BLOOMBERG in New York and Minneapolis

US officials, including Treasury Secretary John Snow, hailed the mainland's first interest rate increase in nine years as a step towards the flexible currency regime they have urged China to embrace.

Mr Snow called Thursday's move a "clear advance" in making the Chinese economy more market-oriented.

He said the rate increase would help cool a Chinese economy that had inflation running above 5 per cent on an annual basis.

"The action they've taken is appropriate," Mr Snow said. "It is consistent with the movement towards more sophisticated management of financial institutions and macroeconomic objectives."

The US continues to lobby China to end its nine-year policy of pegging the yuan at 8.28 to the US dollar.

US Treasury Undersecretary John Taylor said the rate move increased the likelihood China would inject flexibility into its currency system. "This seems to me to be one of the steps consistent with the ultimate move to a flexible exchange rate in China," he said.

US officials, including Mr Snow, say China's currency peg overvalues the yuan, fanning inflation at home and hurting US manufacturers. The Bush administration has put pressure on Chinese officials to loosen the trading band, so far without success.

Mr Taylor predicted China would eventually shift away from its currency peg.