China raised interest rates on Tuesday for the second time in just over six weeks, intensifying a battle against stubbornly high inflation that threatens to unsettle global markets. The timing was a surprise, coming on the final day of China's Lunar New Year holiday, but investors have long expected more monetary tightening as Beijing struggles to rein in price pressures and ward off a property bubble. Benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent, the People's Bank of China said. The changes go into effect on Wednesday. Although annual inflation slowed in December, analysts polled by Reuters expect it to have picked up to 5.3 percent last month, the fastest pace in more than two years, on the back of soaring food prices. "It is the first interest rate rise in the Year of the Rabbit, but it will not be the last," said Xu Biao, an economist with China Merchants Bank in Shenzhen, referring to the country's new year, which began last week. "If inflation stays high in February, the central bank will be forced to increase interest rates on a continuous basis," he added. "Investor confidence will be seriously hurt by expectations of aggressive policy tightening." Fearing tighter monetary policy will dampen demand in a country whose growth helped lift the world out of the global financial crisis, commodity markets fell after the central bank announcement. Three-month copper fell below $10,000 a ton and U.S. crude futures prices dropped. The MSCI world equity index held on to gains, trading up 0.15 percent, but the FTSEurofirst 300 index was down 0.3 percent, turning negative after China's move. For now, however, Chinese officials have insisted that inflation will be controllable and domestic investors have priced in only gradual tightening. Chinese stocks could, in fact, rise slightly when the market re-opens on Wednesday to catch up with Asian counterparts that have rallied during China's week-long holiday. TIGHTENING CYCLE This is the third rate increase since China began a monetary tightening cycle in earnest in October. Wary of raising rates too high, China has leaned most heavily on quantitative tools in its tightening, forcing banks to lock up more of their deposits as reserves seven times over the past year and also ordering them to lend less. Beijing has also imposed a slew of measures to target property prices that have stayed stubbornly high. The country's leaders, acutely aware of public anger over unaffordable housing, have said they would not tolerate property inflation and speculation.

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