China’s central bank will likely need to increase interest rates further in coming months as the three moves since mid-October leave household wealth being eroded by accelerating inflation.

The People’s Bank of China yesterday raised the one-year lending rate by a quarter point to 6.06 percent and the one-year deposit rate an equivalent amount to 3 percent. The deposit rate remains almost 2 percentage points less than the pace of consumer-price gains, giving savers an incentive to buy goods and assets.

“There is still a substantial amount of heavy lifting to do in terms of rates — at this stage of the cycle, the fact that we still have negative real rates is quite alarming,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong and a former adviser to Australia’s government.

Premier Wen Jiabao’s government has yet to return rates to pre-crisis levels, seeking to sustain the economy’s rebound to growth of about 10 percent. With overheating a danger in the first half of the year, policy makers are likely to raise their benchmarks further, order banks to set aside more cash as reserves and let the yuan appreciate to stem price pressures, Wang Qing, a Morgan Stanley economist in Hong Kong, wrote in a note yesterday.

In offshore trading in Hong Kong, the yuan climbed 0.1 percent yesterday to 6.5555 per dollar. Non-deliverable forwards strengthened 0.2 percent to 6.4275, signaling a gain of 2.6 percent in the next 12 months from the Shanghai close of 6.5938.

Holiday End

The central bank moved on the last day of a week-long holiday and before a report next week that may show consumer prices rose 5.3 percent in January, according to the median estimate in a Bloomberg News survey of economists.

That pace is still slower than the most recent inflation rates in Group of 20 nations including Brazil, Russia, India and Argentina, where consumer prices rose 10.9 percent in December from a year earlier.

“A rate rise was expected, but given they delayed to the end of Chinese New Year, it created anxiety over the potential severity,” Gavin Parry, managing director of Hong Kong-based Parry International Trading Ltd. “Now that uncertainty is removed, the markets can focus on the January trade, and the producer prices and consumer-price data next week.”

Government figures expected next week are also forecast to show export growth accelerated in January and producer prices advanced at a faster pace, according to Bloomberg surveys.

Relative Performance

China’s benchmark Shanghai Composite Index has lost almost 5 percent over the past year, in part on concern at the impact of policy makers’ efforts to defuse a property-market bubble in the aftermath of a record lending boom. The MSCI Asia Pacific Index climbed 22 percent in that time by comparison.

A drought that’s threatening grain output and a New Year surge in lending are adding to inflation risks after money supply jumped more than 50 percent in two years. Economic growth accelerated in the fourth quarter to a 9.8 percent annual pace.

Besides increases in rates and banks’ reserve requirements, Wen’s campaign against inflation spans sales of state-food reserves, subsidies for low-income earners, and crackdowns on speculation and hoarding.

China’s 0.75 percentage point of increases in one-year rates since the global financial crisis compare with India raising borrowing costs seven times for a total of 1.75 percentage points. In South Korea, where policy makers meet this week to decide on rates, borrowing costs climbed 0.75 percentage point so far.

‘Accelerated Tightening’

Isaac Meng, a Beijing-based economist for BNP Paribas, said yesterday that he expected “accelerated tightening,” with rates rising by as much as another 1.5 percentage points. Before the financial crisis, the one-year lending rate was 7.47 percent, 1.41 percentage points higher than the level taking effect today.

In yesterday’s move, the central bank raised long-term rates for deposits by more than for loans. For savers, the increase was as much as 45 basis points, for five-year deposits.

“The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property,” said Mark Williams, a London-based economist at Capital Economics Ltd.

Companies from Baoshan Iron & Steel Co. to Starbucks Corp. and McDonald’s Corp. have raised prices. While wages are also climbing, Chinese consumers are more concerned about inflation than at any time in the past decade, according to a central bank survey released in December.

Property Bubbles

China’s government aims to hold inflation at 4 percent this year, state broadcaster CCTV reported in December. Officials also want to limit the risk of property bubbles in an economy awash with cash.

China’s foreign-exchange reserves, the world’s biggest, climbed by a record $199 billion in the fourth quarter to $2.85 trillion, and banks extended 7.95 trillion yuan ($1.2 trillion) of new loans last year, exceeding the government’s targeted maximum of 7.5 trillion yuan.

New lending may have surged to 1.2 trillion yuan in January, according to the median estimate in a Bloomberg News survey of analysts. In December, the amount was only 481 billion yuan, a difference that highlights a pattern of banks lending more at the start of each year.

The government knows January’s inflation number will “look ugly” and wants to be seen as acting in the lead-up to the annual meeting of the National People’s Congress, the country’s lawmaking body, in early March, said Ma Jun, Deutsche Bank AG’s chief China economist.

Inflation is largely being driven by food costs. Last month, a jump in consumer spending ahead of the Lunar New Year holiday and bad weather that damaged crops may have contributed to a higher inflation reading.

Drought hitting parts of the country may cut grain output and undermine efforts to stabilize prices, Premier Wen said in comments reported by the state-run Xinhua News Agency last week.