CHINA’S CENTRAL bank raised interest rates for the fourth time in five months as the government struggles to reduce bank lending, rein in inflation and slow economic growth.

The People’s Bank of China announced it would increase one-year rates by 25 basis points from today, raising the deposit rate to 3.25 per cent and the lending rate to 6.31 per cent.

The increase came earlier than many analysts anticipated and suggested that price rises for March, to be published next week, were probably higher than expected.

Consumer price inflation in China rose 4.9 per cent in February from a year earlier, the same reading as in January. However, politically sensitive food prices accelerated and producer prices increased 7.2 per cent, their biggest rise since October 2008.

Analysts remain divided on whether China’s economy is slowing or more action is needed to prevent overheating. The Chinese economy grew 10.3 per cent last year. Beijing has announced plans to bring the headline rate down while trying to encourage balanced and sustainable growth.

The rate rise yesterday “suggests that Chinese authorities are confident in the sustainability of underlying growth momentum”, according to Wang Qing, a Morgan Stanley economist.

Even after the latest increase in official rates, adjusted for inflation the return on bank deposits in China is negative. Beijing has given priority to the fight against inflation amid fears that runaway price rises could lead to social instability in the one-party state.

“Inflation is like a tiger: once it is set free it is very difficult to put it back in its cage,” Wen Jiabao, China’s premier, said last month.

As well as raising rates, since the start of last year Beijing has increased the proportion of deposits that banks must hold in reserve with the central bank nine times in an attempt to limit the amount they can lend. – Copyright The Financial Times Limited 2011