Analysts welcomed the rise in interest rates announced by the People's Bank of China yesterday, but they said the rise was too small to discourage the runaway pace of investment in the country and predicted further tightening measures to come. The central bank announced an increase of 0.27 percentage points in commercial banks' benchmark one-year deposit and lending rates yesterday in an attempt to slow down investment, which fuelled China's 11.3 per cent economic growth in the second quarter. Qu Hongbin, chief economist for HSBC in Hong Kong, said the rate rise, which will take effect today, was too small to have an impact on fixed-asset investment growth, which rose around 27 per cent year-on-year last month. 'This will not be the last step aimed at tightening liquidity,' he said. 'We expect the PBOC to take further tightening measures in the coming months, with a deposit reserve hike, lending curbs and other quantitative measures being the most likely options.' He said the increase in the deposit rate would create 40 billion yuan in extra interest income for households, and could boost consumer spending. Arthur Kroeber, head of the consultancy Dragonomics in Beijing, agreed the increase in interest rates was too small, adding that boosting reserve ratio requirements would have a stronger downward pull on lending. 'The reserve ratios do more,' Mr Kroeber said. 'I suspect that if the August and September data comes through and they don't see a fall, that another increase in the reserve ratio will be the next step.' Goldman Sachs said, however, raising deposit and lending rates was a much more efficient and credible monetary tightening measure than a reserve requirement increase or other pure administrative tightening measures. 'We have long held the view that market participants in China are very responsive to changes in interest rates [as well as exchange rates], therefore we expect a rising borrowing cost will be a much more effective tool to keep investment growth under control,' said Hong Liang of Goldman Sachs Economic Research. Frank Gong, chief economist at JP Morgan Securities, said the central government needed to address the problem of excess liquidity. 'Without addressing the fundamental issue of excess liquidity, which lies in the currency regime, it will be difficult for the authorities to find effective market-based tools to solve the potential overheating problem,' Mr Gong said. 'In this case, hiking interest rates could backfire as it would attract even more 'hot flows' into the country; one, exacerbating the liquidity problem, and two, repressing domestic consumption.' The Royal Bank of Scotland in Hong Kong said the trade surplus was expected to expand to US$17 billion a month in the fourth quarter of the year, putting further pressure on the economy. 'This liquidity risks feeding a banking sector already stuffed with cash,' said Ben Simpfendorfer, China strategist for the bank. 'The PBOC must remove that liquidity.' Mr Simpfendorfer predicted that the required reserve ratio would rise 50 basis points next month.