Analysts say interest rate rise likely after Communist party's politburo agrees policy change to combat 4.4% inflation

This article is more than 9 years old

This article is more than 9 years old

China is to embrace a more "prudent" monetary policy next year in an attempt to keep tighter control on inflation.

The Chinese government announced earlier today that it will tighten its current "moderately loose" stance in 2011, following a meeting of the Communist party's politburo.

Xinhua, the official news agency, reported that the politburo had agreed to "implement an active fiscal policy and a prudent monetary policy, to increase the focus, flexibility and effectiveness of macro-economic adjustments".

It also quoted Chinese president Hu Jintao warning his colleagues to be "more active in dealing with the relationship between stable economic growth, adjusting the economic structure and managing forecasted inflation".

The change in policy comes after Chinese inflation hit 4.4% in October, a 25-month high, and analysts believe China is now likely to raise interest rates soon, possibly before the end of 2010.

China has been steadily moving to restrain its rapidly growing economy throughout 2010, responding to fears that it could overheat. In October its central bank raised interest rates for the first time in nearly three years, while last month it ordered banks to hold more cash in reserve.

Two years ago China launched a 4 tn yuan (£384bn) fiscal stimulus package, to prevent the country being sucked into the global downturn. The resulting credit boom saw bank lending across China soar, pushing up real estate prices. There are also concerns that China's banks are sitting on more bad debts than is officially acknowledged, adding to the pressure to rein in borrowing.

China's economy is expected to grow by around 10.5% in 2011.

"Growth seems pretty solid and inflation is higher than expected," Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates, told Associated Press. "Put that together and it makes sense to shift policy position."

Jeremy Batstone-Carr, analyst at Charles Stanley, predicted that there would be "heightened concerns" in the financial markets about a rise in Chinese interest rates.