The People's Bank of China, the central bank, on February 9 raised interest rates for the first time in 2011, in order to tame inflation.

The one-year benchmark deposit rate rose from 2.75 percent to 3 percent, while the one-year benchmark lending rate grew by 25 percentage points, to 6.06 percent, said the central bank.

After a two-year lending spree, a flood of liquidity is sloshing around the Chinese economy, fueling inflationary jitters and housing bubbles. The consumer price index (CPI), a barometer of inflation, hit a 28-month high of 5.1 percent in November 2010, followed by 4.6 percent in December.

In response, policy-makers have been pushing all the buttons to rein in inflation. The government has pledged to take a prudent monetary stance this year, marking a switch from the moderately loose policy adopted to counter the financial crisis.

The interest rate increase was fully expected, given the strength of China's 2010 fourth-quarter GDP (9.8 percent), which allowed China to intensify its tightening efforts, said Qu Hongbin, HSBC's Chief Economist for China.

"Interest rate hikes are essential for anchoring inflationary expectations and narrowing the negative interest rate gap," he said.

"For the average consumer, people will feel that inflation is worse because you go buy food every day and food inflation is higher than 10 percent," said Wang Tao, China economist at UBS.

Lu Zhengwei, an analyst at the Industrial Bank Co. Ltd., believed consumer prices in the country still face upward pressures in the first half of 2011.

More policy moves, especially increases in the reserve requirement ratio, are in the pipeline to soak up excess liquidity, he said.