The People's Bank of China (PBOC), the central bank, announced on Tuesday it would raise benchmark one-year borrowing and lending rates by 25 basis points beginning Wednesday.
The rate hikes come amid increasing pressure on the Chinese Government to control inflation.
After the hikes, the benchmark one-year deposit interest rate will climb to three per cent, while the one-year loan interest rate will reach 6.06 per cent.
As for two-year and three-year deposits, the interest rates will be 35 basis points higher to 3.9 per cent and 4.5 per cent, respectively. The interest rate for mortgage and other loans of more than five years will rise 0.2 percentage point to 6.6 per cent.
This is the first rise in China's one-year benchmark interest rates this year and signals a renewed effort to cool prices and tighten liquidity.
Analysts said the timing of the hike, immediately after the Lunar New Year holiday, would send a strong signal to the market that the PBOC was paying more attention to inflation.
"Though the December consumer price index (CPI) slid slightly from November, we are still facing great inflationary pressures in the first half of this year," said Professor Zhang Liqing, President of School of Finance with the Central University of Finance and Economics.
"This is the fundamental factor behind the central bank's interest rate hikes this time," said Zhang.
China's CPI, a main gauge of inflation, rose 4.6 per cent in December year on year, slightly lower than November's 5.1 per cent, which was a 28-month high.
For the whole of last year, the CPI was up 3.3 per cent and exceeded the government's target to keep it below three per cent.
"The Lunar New Year gift by the Central Bank (to raise interest rate) is not surprising because the yuan-denominated new loans in January will possibly surpass one trillion yuan (about 151.8 billion U.S. dollars), thus pressing the Central Bank to quicken its pace to tighten liquidity," said Wang Jun, a macro economy researcher at China Centre for International Economic Exchanges.
"Moreover, it is very likely the CPI will jump to a fresh high in January, making it necessary for the central bank to resort to tools such as interest rates hikes to curb inflation," Wang said.