CHINA HIKES INTEREST RATES TO COOL INFLATIONRELATED STORIES

London, Febreuary 8 (MW)- China’s central bank announced Tuesday that it would raise its key interest rates for the third time since October in an effort to cool rising inflation pressures.

The People’s Bank of China said in a statement that it will raise its one-year yuan lending rate to 6.06% from 5.81% effective Wednesday, while boosting the one-year yuan deposit rate to 3% from 2.75%. Rates were previously hiked in October and December.

The move appeared to temporarily dent overall risk appetite, with U.S. stock futures paring early gains to trade nearly flat. Read Indications column on U.S. stock-index futures.

IMF urges fiscal restraintThe IMF's No. 2 official, John Lipsky, says emerging countries need to tighten monetary and fiscal policies to help tackle the rise in global food and fuel prices.

In currency markets, the Australian dollar /quotes/comstock/21o!x:saudusd (AUDUSD 1.0141, +0.0010, +0.0987%) gave up a strong gain versus the U.S. unit to change hands at $1.0137, a rise of 0.1% on the day. Earlier, the Aussie had traded just below $1.02 against the U.S. unit.

The Australian unit is particularly sensitive to PBOC moves due to Australia’s proximity to China and its reliance on Chinese demand for Australian raw materials.

The U.S. dollar initially saw widespread but temporary gains in the wake of the move. The euro /quotes/comstock/21o!x:seurusd (EURUSD 1.3629, +0.0045, +0.3313%) initially trimmed its advance against the dollar but then pushed back toward its daily high to change hands at $1.3661, a gain of 0.6%.

China’s rate hike will likely make it difficult for asset markets to muster much bullish sentiment Tuesday, said Kathleen Brooks, research director at Forex.com. But she said China is embarking on a “very slow, steady hiking cycle” and noted that real Chinese interest rates -interest rates minus inflation- remain negative.

“At this stage of China’s tightening cycle, today’s hike shouldn’t really be that much of a surprise to the market and should only have a limited effect on asset prices,” Brooks said, in a note to clients.

The tightening moves come as economists note rising concerns about China’s ability to rein in growth and stifle inflationary pressures without triggering a hard landing that could derail a fragile global recovery.

Fears of a property bubble have been stoked by stories of empty apartment blocks, with units held as speculative investments by Chinese investors.

China’s consumer price index rose 4.6% in December compared with the same month in 2009, slowing from the 5.1% annual inflation pace seen in November. But worries about inflationary pressures remain.

A February rate hike was expected, but the timing was still “somewhat of a surprise,” said Atif Latif, director of trading for equities and derivatives at Guardian Stockbrokers in London.

“In order to combat the high inflation, they have had to act, but there have been many disagreements on China’s monetary-policy strategy,” Latif said. “This being the second hike in six weeks brings the fight against inflation closer”.

Strategists at RBC Capital Markets said Beijing will also likely tolerate further strength by the yuan currency as part of its inflation-fighting effort -a development that would be welcomed by the U.S. The RBC strategists expect the yuan to strengthen to a rate of 6.20 per dollar by year-end versus the 6.45 level implied by the market in nondeliverable forwards.

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