BEIJING (Reuters) - China’s growth ebbed in the third quarter while inflation edged higher, suggesting that the world’s second-largest economy was far from overheating and that an interest rate rise this week may be enough for now.

Coming a day ahead of G20 finance ministers’ meeting in South Korea where the United States and others are expected to push for a stronger Chinese currency, the data could in fact lead Beijing to put appreciation back in the slow lane to reflect the cooler economic conditions.

“The window for large yuan gains is closing fast. Export growth is slowing and, assuming the current trend is sustained, year-ago growth is on track to fall well below 10 percent,” said Ben Simpfendorfer, an economist with RBS in Hong Kong.

The yuan has risen 2.36 percent since the end of August, its quickest pace of appreciation since a revaluation in 2005.

The data published on Thursday was broadly in line with forecasts, but was still something of a surprise after China’s unexpected rate rise on Tuesday prompted speculation growth and inflation would be much stronger than expected.

“Chinese officials are likely feeling quite pleased with the way the data are playing out,” said Brian Jackson, an economist with Royal Bank of Canada, in Hong Kong.

“Policy measures put in place earlier this year appear to have helped steer the Chinese economy through a middle course between overheating and a serious downturn.”

Financial markets were largely unmoved by the data.

Economic growth dipped to 9.6 percent in the third quarter from a year earlier, down from 10.3 percent in the second quarter, data from the National Bureau of Statistics showed. The consensus expectation was a 9.5 percent pace.

Much of the slowdown can be explained by a higher base of comparison after China’s rebound last year from the global financial crisis.

It also is a desired outcome for the government, which has gradually withdrawn the monetary and fiscal stimulus that powered the recovery.

An employee works at the assembly line of Anhui Jianghuai Automobile Co. Ltd in Hefei, Anhui province October 19, 2010. REUTERS/Stringer

Annual inflation rose in September to 3.6 percent, reaching a 23-month high and smack in line with forecasts. Excluding food prices, inflation slowed.

But industrial output -- a key indicator of growth momentum -- eased to a 13.3 percent year-on-year increase, its lowest pace in 13 months and missing forecasts of a 13.6 percent rise.

STEADY AFTER THE SURPRISE

China surprised markets on Tuesday as it attempted to cool asset prices with its first increase in interest rates in nearly three years.

In comments published on Thursday, central bank governor Zhou Xiaochuan drew attention to a series of potential pitfalls.

“Macro-economic risks linked to excessive liquidity, inflation, asset bubbles and a cyclical rise in bad bank loans are rising significantly,” he said.

Yet with overall price pressures mild, many analysts think Beijing can afford to wait until next year to gauge the impact of higher rates before hiking them a second time.

“The GDP figure gave the central bank confidence to raise interest rates,” said Nie Wen, an economist with Fortune Trust in Shanghai.

“But most other countries are now implementing loose monetary policies, like the United States, so it is not good for China to raise interest rates again,” he said.

Simpfendorfer said the rates outlook would depend in large part on the property sector. Despite a months-long campaign to crack down on speculative buying, housing prices have started to climb again and the government is determined to calm the market.

In a statement accompanying the release of the data, the statistics agency said China would maintain policy stability and consistency, while also making measures more targeted and flexible -- code for minor adjustments rather than wholesale abandonment of monetary policy that the government still describes as “appropriately loose.”

INFLATION NEAR ITS PEAK

China’s inflation is not broad based. Food prices, which account for a third of the country’s consumer price index, rose by an annual 8.0 percent in September, while core non-food inflation slowed to 1.4 percent from 1.5 percent a year earlier.

With food prices still climbing, October’s inflation reading could be higher again, but that could be the peak.

“We expect GDP growth to continue slowing to around 9 percent year-on-year in the coming quarters,” Sun Junwei, HSBC’s China economist. “A negative output gap should further ease underlying inflationary pressure.”

Because the interest rate rise was so unexpected, many in the market had assumed that the growth and inflation figures would be surprisingly strong.

In this cycle of growth, it appears that the Chinese economy peaked in the first quarter, when it expanded 11.9 percent from a year earlier.

That may stand as the strongest quarter for years to come, because the government is now trying to reform the economy, shifting it away from high-octane investment growth and toward greater reliance on domestic consumption.