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World News: Central Banks Grapple With Competing Forces --- China Raises
Rates to Fight Inflation
Aaron Back, Jason Dean. Wall Street Journal. (Eastern edition). New York, N.Y.: Apr 6, 2011. pg. A.14

Abstract (Summary)
Chinese policy makers have argued that loose monetary policy in the U.S. causes inflation pressure in China because
it lifts commodity prices and causes funds to flow into faster-growing emerging markets.

Full Text (557 words)

(c) 2011 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or
distribution is prohibited without permission.

BEIJING -- China raised interest rates for the fourth time in less than six months, in a fresh attempt to battle faster
inflation that has weighed on consumers and businesses in the world's No. 2 economy.

The People's Bank of China said benchmark rates would increase Wednesday by a quarter percentage point to 3.25%
for one-year deposits in the local currency, and 6.31% for one-year loans. The central bank has now raised the official
cost of credit by one percentage point since October, but deposit rates remain well below the rate of inflation, and
lending rates are only slightly above it.

The central bank's statement said the increase would also apply to mortgage loans. That was also true with previous
increases, but Tuesday was the first time in the series of recent moves that the central bank flagged the effect on
mortgages, indicating at least part of its motivation is to contain rising property prices, a major source of public
complaint.

A rate increase was expected, though the timing of Tuesday's news -- on a national holiday when markets were closed
-- was earlier than some expected. That prompted speculation that the consumer-price index reading for March, to be
announced next week, may be higher than Beijing had hoped. In both January and February, the CPI rose 4.9% from a
year earlier, down slightly from November's 5.1% but still near 2 1/2-year highs.

"This rate hike suggests that the March CPI that is to be released early next week may have surprised to the upside,"
said Morgan Stanley economist Wang Qing in a note. "It also suggests that Chinese authorities are confident in the
sustainability of underlying growth momentum."

China's leaders are trying to manage a precarious balance between damping inflation -- which, at much higher levels,
has triggered social unrest in China in the past -- and keeping its economy churning fast enough to generate jobs for
its huge population. Beijing's success or failure holds consequences for the global economy because Chinese
economic growth is a major driver for corporations and economies that sell consumer goods and commodities to China.

Developing economies around the world are battling soaring consumer prices, thanks in part to ultra-low interest rates
in developed economies that are trying to keep growth from petering out. Chinese policy makers have argued that
loose monetary policy in the U.S. causes inflation pressure in China because it lifts commodity prices and causes
funds to flow into faster-growing emerging markets.

In addition to raising rates, China has sharply increased the share of deposits that lenders must keep on reserve with
the central bank in an effort to reduce the flow of credit after two years of huge loan growth. Authorities have pressured

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companies to delay planned increases in prices of consumer staples.

Property prices have continued to rise in most major Chinese cities despite a series of measures by central-
government regulators to rein them in.

Still, some economists say China may be nearing the end of its tightening efforts. "We think rates may now have
peaked," economist Mark Williams of consulting firm Capital Economics said.

---

Liu Li in Beijing and Alex Frangos in Hong Kong contributed to this article.

(See related article: "Europe, U.S. Chart Different Courses As Economies Recover and Prices Rise" -- WSJ April 6,
2011)

Credit: By Aaron Back and Jason Dean

Indexing (document details)

Subjects: Interest rates, Monetary policy, Central banks, Economists, Consumer Price Index
Author(s): Aaron Back, Jason Dean
Document types: News
Publication title: Wall Street Journal. (Eastern edition). New York, N.Y.: Apr 6, 2011. pg. A.14
Source type: Newspaper
ISSN: 00999660
ProQuest document ID: 2311673891
Text Word Count 557
Document URL: http://libproxy.uta.edu:2072/pqdweb?did=2311673891&sid=1&Fmt=3&cl
ientId=89&RQT=309&VName=PQD

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