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China may limit rate increases after raising bank reserve ratio

China may limit interest-rate increases over the rest of the year, focusing on other tools for combating inflation as the government seeks to cool prices without choking off growth.

The central bank Thursday raised banks’ reserve requirements for the fifth time this year. The half-point increase takes effect May 18 and will boost levels for the nation’s biggest lenders to a record 21 percent. 
The headquarters of the People’s Bank of China in Beijing. (Bloomberg)
The headquarters of the People’s Bank of China in Beijing. (Bloomberg)

Policy makers will raise borrowing costs only once more this year, after four increases in the past seven months, Goldman Sachs Group Inc. and Deutsche Bank AG predicted Thursday. Higher interest rates may damp growth while also attracting speculative capital, or “hot money,” to the fastest-growing major economy. Alternative tools include quicker gains in the yuan, as sought by the U.S.

“The room for further rate hikes is quite small this year on concerns of hot money and economic growth,” said Lu Ting, a Hong Kong-based economist for Bank of America Merrill Lynch. “We surely expect more reserve requirement ratio hikes.”

Goldman analysts said officials may allow the yuan to keep climbing against the dollar at a 6 percent annual pace.

The central bank raised reserve requirements a day after reports showed inflation and lending exceeded economists’ estimates in April, with consumer prices rising more than 5 percent. The same batch of data showed industrial output growth slowed, suggesting that the nation’s expansion may be cooling from a 9.7 percent annual pace in the first quarter. (Bloomberg)
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