The People's Bank of China, the central bank, on December 26 raised interest rates the second time in 2010, to tame inflation.

The one-year benchmark deposit rate will rise to 2.75 percent from 2.5 percent while the one-year benchmark lending rate will increase by the same 25 basis points to 5.81 percent, said the central bank.

China's consumer price index (CPI), the main gauge of inflation, rose 5.1 percent year on year in November, a 28-month record. Meanwhile, the residents' price satisfaction index sank to an 11-year low of 13.8 percent in the fourth quarter, according to a central bank-conducted survey of over 20,000 residents in 50 cities.

The government has been pulling on a number of policy levers to rein in inflation. The central bank's vice governor Hu Xiaolian said China would bring its overall money supply to a normal level using various policy tools.

The rate increase came at the right time, as Western countries were celebrating the Christmas holiday, to avoid overreaction from the global markets, said Li Daokui, member of the Monetary Policy Committee of the central bank and an economics professor at Tsinghua University.

Lu Ting, an economist at the Bank of America-Merrill Lynch in Hong Kong said the central bank will probably feel less pressure to act as inflation cools in coming months. He forecast December's CPI growth will ease to 5 percent, and in the first half of 2011, the CPI is likely to grow between 4.5 and 5 percent.

"We don't expect more aggressive rate hikes because Beijing still takes growth as the top priority," he said.