BEIJING (Dow Jones)–China has decided to raise interest rates for the second time in slightly over two months, signaling the authorities’ resolve to combat rising inflation despite concerns over intensifying capital inflows triggered by ultra easy monetary conditions in the U.S. and Japan.

Beijing’s latest move also suggests the world’s second-largest economy may be entering a relatively formal monetary tightening cycle and that policy-makers may have been convinced that the weapons used so far, such as credit rationing and artificial price controls, have failed to cool politically-sensitive consumer price pressures.

The People’s Bank of China said Saturday that effective Sunday, it will raise the one-year yuan lending rate by 0.25 percentage points to 5.81% from 5.56%, and the one-year yuan deposit rate to 2.75% from 2.50%. The move comes after the central bank hiked on Oct. 19 the benchmark lending and deposit rates also by 25 percentage points each, the first rate hike in nearly three years.

Saturday’s announcement shows that the PBOC will likely hike interest rates more often next year to curb overly ample liquidity and rising inflation, said Brian Jackson, an economist at the Royal Bank of Canada.

“We expected a rate hike by the end of the year, though Christmas Day is something of a surprise–a rate hike is not normally on the wish-list for Santa Claus, but in China’s case this is a prudent move,” said Jackson.

Source : Wall Street Journal

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