China's central bank said Friday there was no immediate need to adjust the current deposit interest rate. It made the statement on the same day that it raised the lending rate for the first time in 18 months.

"The current deposit rate is comparatively reasonable as the consumer price index is now relatively low," the central bank said in the statement, citing it that as one of three reasons why it didn't adjust the rate.

"Keeping the deposit rate unchanged is conducive to encouraging consumption and thus increase domestic demand," continued the statement. "It's also helpful to develop more investment tools and spur the healthy growth of the capital market."

The People's Bank of China raised its benchmark one-year lending rate by 27 base points to 5.85 percent on Friday while keeping the one-year standard deposit rate unchanged at 2.25 percent.

The rate rise comes as the country's economy grows at a quicker than expected rate --10.2 percent in the first quarter this year.

"There are some problems in the generally healthy economy such as fast fixed-asset investment growth, the relatively excessive money supply and a too quick lending growth which warrants heightened attention," the central bank said in website statement. 

Outstanding loans in local currency in all financial institutions reached 20.6 trillion yuan (US$2.6 trillion) at the end of March which is up 14.7 percent year-on-year.

"The economy is a little bit hot and the rate rise is just a modest adjustment," Zhou Xiaochuan, the central bank's governor told reporters at a financial seminar on Friday.

The decision to leave the deposit rate unchanged has led some to be concerned about the effectiveness of its objective to rein in the high-speed lending growth as the widening gap between lending and deposit rates are likely to encourage banks to lend more.

"This is a legitimate concern and that's why the central bank has to urge commercial banks to pay attention to their pace of new lending," said Yi Gang, assistant governor of the central bank, at the seminar.

"The central bank's (rate rise) decision this time is ahead of the country's economic cycle," said Li Yongsen, an economist with Renmin University of China.

"Such timing will make these measures more effective and also shows that the central bank is becoming more proactive in responding to macroeconomic situations," he added. .

"It's a clear signal to the property market that the central government has the determination and the means to curb investments and housing prices," said Yi Xianrong, a researcher with the Chinese Academy of Social Sciences.

Shares of financial institutions, boosted by the rate rise, outperformed the overall stock market on Friday. Bank shares, with their profits expected to gain as the margin between deposit and lending rates widens, closed high on Friday.

China Merchants Bank surged as much as 9.94 percent, close to the upper daily limit of 10 percent, while China Minsheng Banking Corp, the country's largest private bank, rose 8.14 percent.

The benchmark Shanghai Composite Index closed at 1440.22 points on Friday gaining 1.66 percent.

(China Daily April 29, 2006)