Inflation in China. Government takes further action. More will be needed to deal with property bubble.

Battling inflation, China hikes interest rates (Toronto, Globe and Mail)

Beijing— Reuters Published Saturday, Dec. 25, 2010 9:14AM EST

China’s central bank raised interest rates on Saturday, the second rise in just over two months, stepping up its battle to rein in stubbornly high inflation.

The People’s Bank of China said it would increase the benchmark lending rate by 25 basis points to 5.81 per cent and raise the benchmark deposit rate also by 25 basis points to 2.75 per cent.

The central bank said in a statement on its website that the latest rate rise would take effect on Sunday.

Annual Chinese consumer price inflation raced to a 28-month high of 5.1 per cent in November, in part due to excess cash in the economy that is driving prices higher.

While almost all investors and analysts thought more tightening was coming, there was uncertainty about whether the central bank would raise rates before the end of the year.

The move came after Beijing said early in December it was switching to a “prudent” monetary policy, from its earlier “moderately loose” stance.

Analysts said the change of wording could pave the way for more interest rate increases and lending controls.

Chinese stock markets have shed nearly 10 per cent since mid-November on concerns the government would ratchet up its monetary policy tightening in face of rising inflation.

To tame price pressures, China raised interest rates on Oct. 19 for the first time in nearly three years. The consensus of analysts polled by Reuters this month was for three rate rises of 25 basis points each by the end of next year.

Along with playing a key role in the fight against inflation, policy tightening also signals the government’s confidence that the world’s second-largest economy is on solid ground, even as the U.S. and European recoveries remain fragile.

China has also officially increased banks’ required reserve requirements six times this year and restricted lending by them.

In addition, Beijing has taken a slew of steps to cool the property sector, trying to ward off a potential asset bubble.