China in Monetary-Tightening Cycle

(Beijing) -- With the third interest rate hike in less than four months effective on February 9, China is on a track of further monetary tightening, with more rate hikes likely in 2011.

Throughout 2010, inflation was higher than the one-year deposit interest rate, eroding the wealth of households. The one-year deposit interest rate is now 3 percent and the one-year lending rate at 6.06 percent after a 25 basis point hike was announced February 8, the last day of the week-long Lunar New Year. Many economists say that the figure for inflation in January, to be released next week, is expected to surpass 4 percent.

The previous two interest rate hikes failed to lure consumers into putting their money in term deposits. Meanwhile, the ongoing drought in China's wheat-growing northern provinces, whose output make up half of the country's total, may further add to inflationary pressures.