As per Reuters:
Benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent, the People's Bank of China said. The changes go into effect on Wednesday.
Although annual inflation slowed in December, analysts polled by Reuters expect it to have picked up to 5.3 percent last month, the fastest pace in more than two years, on the back of soaring food prices.
The rate hike was a surprise, coming as it did just before the Lunar New Year holiday. Commodity prices—especially oil—took a hit on the news, and there is concern that the hike will affect Chinese growth.
However, as highlighted, inflation is the concern.
Indonesia, South Korea, Thailand and India have all raised rates so far this year—all of them doing so on concerns about inflation, which has been hitting those economies rather severely.
The Chinese rate hike, coupled with their renewed (and ham-fisted) efforts at price controls, underlines how concerned the Chinese leadership is. They are also probably keeping a wary eye on developments in Egypt: After all, the Egyptian Crisis was triggered by rising food prices.
The Chinese Communist Party (CCP) has essentially a tacit understanding with the Chinese people: Let us rule you without debate, and we will give you food and prosperity.
The CCP cannot allow food price inflation to break that promise. So expect them to do everything necessary to keep food prices low.
If that means more rate hikes in the near term, then by Mao, there’ll be more rate hikes—as many as necessary, to keep the population happy. Or at least keep them from revolting.