The People's Bank of China (PBOC) announced on Friday that it will raise the one-year benchmark interest rate by 0.27 percent from August 19.

The one-year deposit rate is raised to 2.52 percent and the one-year loan rate 6.12 percent, according to PBOC, or the central bank.

The central bank raised the loan rates by the same margin in late April but did not change the deposit rates.

China's economy surged by 10.9 percent in the first half of 2006, the fastest in a decade, driven by fast credit loans growth and excessive use of land for industrial projects.

The central bank raised commercial banks' deposit reserve ratio earlier this week by 0.5 percent to rein in excessive bank lending.

To allow market forces a bigger role in deciding the interest rate for housing mortgage loans, the central bank decided to lower the bottom line of housing mortgage loans from 0.9 times the benchmark interest rate to 0.85 times.

For other commercial loans, the bottom line will remain 0.9 times the benchmark rate.

Raising the interest rate will help rationalize the growth of investment and loans, force businesses and financial institutions of properly assess risks, maintain price stability and promote the change of the country's growth model, a spokesperson from the central bank said.

China's urban fixed asset investment soared by 30.5 percent in the first seven months, up 3.3 percent on the previous year, driving the economy to the verge of overheating.

Preventing the economy overheating has become the priority of China's economic planners in recent months.

To rein in the investment, the government has, in addition to raising the interest rate and deposit reserve of banks, launched a nationwide crackdown on irregularities in land supply and project approvals.

On Thursday, chairman of the Inner Mongolian autonomous regional government Yang Jing and two of his deputies, were sanctioned by the central government for failing to stop billions of yuan from being poured into unauthorized power stations. They are the first ministerial officials to be penalized for ignoring the macrocontrol policies.

In its latest move, the central bank has deliberately raised the interest rates of long-term loans by a larger margin than short-term loans.

For example, the benchmark interest rate for a one-year loan was raised from 5.85 percent to 6.12 percent, but that of a five-year loan went up by 0.45 percent from 6.39 percent to 6.84 percent.

This is aimed at reducing the supply of middle to long-term loans that usually go on fixed asset investment, the spokesperson said.

Source: Xinhua