Economists had earlier warned that the central bank might raise rates during the week-long new year holiday. That is because January's consumer price inflation might have resumed its rise after easing to 4.6 per cent in December from November's 5.1 per cent - a 28-month high. Mainland institutions and financial markets officially reopen today.

European shares and the prices of key commodities imported by China, such as crude oil and copper, fell shortly after the rate rise on concerns of weaker mainland demand.

December's lower inflation was due to a temporary relief in food inflation and a shift in the comparison base. But seasonally buoyant demand during the new year holiday, icy weather in southern China and droughts in northern China likely resulted in a rebound in food inflation, economists said.

Wang estimated that January's CPI had risen to 5.4 per cent and, while it is expected to moderate slightly this month, she expected it to average 5.2 per cent in the first half.

Morgan Stanley economists projected last month's CPI to reach 5.2 per cent, the highest in the latest inflation cycle, while HSBC economists expect it to reach 5 per cent to 6 per cent in the next few months.

Another reason for Beijing's tough measures is the stronger-than-expected economic growth of 9.8 per cent in the fourth quarter - up from 9.6 per cent in the third quarter - despite a series of tightening measures.

'The strength of recent growth numbers has given Beijing policy-makers more room to strike harder with more decisive tightening measures,' said Qu Hongbin, HSBC co-head of Asian economics research.

Premier Wen Jiabao has repeatedly pledged that the central government would bring inflation and home prices under control.

Yi Xianrong, an economist at the Chinese Academy of Social Sciences, said Beijing might have to raise rates again, possibly as early as late March, if the CPI exceeds 5 per cent this month.

UBS' Wang tipped the next rate rise to happen in April.

HSBC's Qu wrote in a research note that the next 25 basis point rate rise would likely arrive early in the second quarter. However, he expected further rises to remain moderate and Beijing to rely more on raising banks' reserve ratios as a policy tool.

'The PBOC has to strike a difficult balance between fighting inflation via rate rises and fending off speculative flows into the mainland,' he wrote. 'Too aggressive a policy rate rise would only serve to attract more capital inflows ... and further exacerbate [domestic excess liquidity].'

Consumer prices are not the only priority for Beijing, which is also fighting a tough battle to bring down credit growth to cool the economy.

Morgan Stanley estimated that up to 1.2 trillion yuan (HK$1.42 trillion) of new loans were made in the first two weeks of January, compared with 1.39 trillion yuan a year earlier, which they said was 'unacceptable', given Beijing's tightening stance.

Taking steps

The PBOC has raised interest rates three times in four months

UBS Securities economist Wang Tao predicts mainland consumer price inflation in January rose to: 5.4%