China's central bank announced on Saturday that the one-year benchmark interest rates are raised by 0.27 percentage points as of March 18.

The one-year rate for deposits is increased to 2.79 percent and that for loans to 6.39 percent, according to the People's Bank of China, or the central bank.

This is the first interest rate rise in 2007 after the central bank had raised commercial banks' deposit reserve ratio by 0.5 percentage points twice earlier this year to rein in excessive bank lending.

The central bank raised the rates for both deposits and loans by the same margin in August last year.

Raising the interest rates will help rationalize the growth of investment and lending, maintain price stability and promote healthy and fast development of the economy, the central bank said in a statement on its website.

"By raising the interest rates, the central bank signaled its concern over the trend towards a higher inflation rate and an overheated economy", said Tang Min, chief economist with the Asia Development Bank Mission in China.

China's economy surged 10.7 percent last year, the fourth consecutive year of double-digit growth, driven by hefty investment and rocketing foreign trade, both of which registered a 24 percent year-on-year growth in 2006.

The Chinese government planned to keep the country's consumer price index (CPI), a major inflation indicator, under three percent this year but the index rose 2.7 percent in February and is still likely to rise further.

"The monetary policy must ensure the balanced economic development as the serious problem of excess liquidity is affecting every aspect of the economy", said Qin Chijiang, vice secretary general of the China Society for Finance and Banking.

China will employ a full range of monetary policy tools to adjust money and credit supplies in order to address the problem of excess liquidity in the banking system, according this year's government work report.

"The reserve ratio adjustments in January and February were effective in absorbing excess liquidity in banks but failed to curb commercial bank's excessive lending", said Yin Jianfeng, an expert with the China Academy of Social Sciences, adding that "the interest rate rise will help control the overall supplies of money and credit".

"To withdraw excess liquidity, the central bank had employed a full range of monetary policy tools, including issuing notes, raising deposit reserve ratio and increasing the benchmark interest rates", said Qin.

Tang believed an increase of 0.27 percentage points in the interest rates was merely a "slight adjustment" and did not herald the end of the central bank's control policy.

The central bank usually raises deposit reserve ratio when there is excess liquidity in the banking system and inflation pressures remain moderate, said Tang.

But various measures - including an interest rate rise - will be adopted once inflation pressures increase, he added.

Yin said, "The central bank usually raises the benchmark interest rates by 0.27 percentage points because sharp adjustments will make too strong an impact on the market."

"An interest rate rise may cause overseas idle funds to enter the country", said Qin. "Economic restructuring is the fundamental way of curbing excess liquidity and preventing a rebound in investment". 

(Xinhua News Agency March 18, 2007)