China raised interest rate by 25 basis points to 5.81 percent to analysts’ surprise. Many thought China would hold interest rate on the eve of Christmas. It also raised repo rate or deposit rate by 25 basis points to 2.75 percent. China’s rate raise shows that China is committed to fight rising inflation. The interest rate was raised last time on October 19 for the first time after the world financial crisis.
China worries are centred on inflation and property bubble. Food prices are on rise in China threatening widespread unrest. Property rates are also rising threatening to cause a property bubble. China’s rate rise has to be seen in this background. Rate rise also signals that China is confident that its growth gained strong hold.
China inflation was recorded 5.5 percent in November last week. China raised banks’ reserve requirements six times in 2010 restricting them from lending.