By AARON BACK
BEIJING—China announced an increase in the share of deposits banks must hold in reserve, its fourth such move this year, a fresh step in its battle against inflation that came after data showed consumer prices rising at their fastest clip in nearly three years in March.
The People's Bank of China said Sunday that it will raise banks' reserve requirement ratio by a half percentage point, effective from Thursday. It is the tenth time since the start of last year that it has raised the ratio, which the central bank is using to try to slow issuance of new credit into its inflation-rattled economy.
The announcement came just 12 days after the latest interest-rate increase. It follows data released Friday that showed the consumer-price index rose 5.4% in March, the fastest pace since July 2008. The government also said gross domestic product grew 9.7% from a year earlier in the first quarter, down only slightly from 9.8% growth in the fourth quarter of 2010, despite a raft of tightening measures in recent months.
"Beijing did not take long to respond to the strong inflation number on Friday," Royal Bank of Canada economist Brian Jackson said in a note. "Today's move suggests that another increase in interest rates is on the way soon."
UBS economist Wang Tao said a large amount of foreign-exchange inflows in the first quarter added to liquidity in the economy, putting further pressure on the central bank to tighten.
China's foreign-exchange reserves swelled by $197.4 billion in the first quarter to $3.0447 trillion, which economists said was likely a sign of large inflows of speculative capital chasing returns on the rising yuan.
People's Bank of China Gov. Zhou Xiaochuan said in an interview Sunday with the state-run Xinhua news agency that monetary policy may continue to be "appropriately tightened" for some time. The interview was published shortly before the reserve-ratio increase was announced.
Sunday's increase in the reserve ratio will lock up roughly $56 billion in bank credit, parking it at the central bank instead of having it loaned out, according to Dow Jones calculations based on central bank data on deposits at the end of February.
China's official reserve requirement ratio for most banks will be 20.5% after the latest increase takes effect, based on the central bank's public announcements. However, the central bank is now forcing some banks that lend too aggressively to hold even higher levels of reserves.
Qian Weihai, an analyst at Shanghai Securities, said China's domestic stock market is likely to slip Monday in reaction to the move, but the extent of the decline will be limited. "The market won't be very sensitive to the hike in banks' reserve requirement ratio as investors had anticipated the central bank would launch further tightening steps in the short run after Friday's data release," said Mr. Qian.
While further tightening measures by the People's Bank of China have been expected, the outlook on the timing and number of reserve-ratio increases has been cloudy.
In a poll of economists taken earlier this month, eight of 10 said they expected one more interest-rate rise this year. Expectations for the reserve ratio, however, varied widely, with forecasters calling for anywhere between one to four more increases. Four of 10 economists polled said they expected a reserve-ratio increase in April.—Tom Orlik in Beijing and Wang Ming in Shanghai contributed to this article.