Mainland banks are expected to benefit from the country's first interest rate increase since 2007 because of wider margins as the demand deposit rate has been kept unchanged. Profits at 11 publicly traded mainland banks might increase by between 3.9 per cent and 7.4 per cent after the People's Bank of China unexpectedly lifted benchmark deposit and lending rates, said Morgan Stanley in a report yesterday. In the first interest rate increase since the global financial crisis, the central bank surprised the market on Tuesday by raising the one-year benchmark deposit and lending rates by 25 basis points, effective from yesterday. Economists widely believe that Beijing raised the interest rates to contain inflation expectations and cool the overheated property market as the consumer price index rose 3.5 per cent year on year in August, the fastest pace in 22 months. The rate rise is asymmetrical, with larger increases in long-term deposits rates than in long-term lending rates, indicating Beijing is still concerned about the loan burden of borrowers and the economic recovery, say economists. The interest rate on demand deposits, which account for between 47 per cent and 56 per cent of Hong Kong-listed mainland banks' total deposits, is unchanged at 0.36 per cent. 'For banks, this is a sweet spot - rate increases lead to wider margins without really hurting economic growth,' said Sanjay Jain and Daisy Wu, analysts with Credit Suisse, in a research note. 'While some depositors may shift from demand for short-term to longer-term deposits, we do not see a big move as rates are likely to head higher.' Many economists have forecast more rate rises will follow next year as China faces an uphill battle to rein in agricultural prices and prevent asset bubbles. The rate increase showed the government was unwilling to hurt banks' profitability and mainland banks were 'extremely attractive' on valuations, according to market analysts. Li Yamin, an analyst with Shenyin and Wanguo Securities, said the rate increase would mainly give the banks a boost in profits next year and there was 'at least 20 per cent upward room' for bank shares. Bank stocks were battered this year after lenders announced massive fund-raising plans to replenish capital eroded by the lending spree last year. In a bid to help finance the nation's stimulus package and expand profits, banks extended a record 9.6 trillion yuan in new loans last year. The target for this year is 7.5 trillion yuan. Li forecasts this year's lending to be 7.5 trillion yuan or slightly higher as companies have limited financing alternatives on the mainland. 'On the supply side, although banks are more motivated to extend loans, the banking regulator and the central bank are likely to closely monitor lending to avoid excessive liquidity,' she said.