Economists say rates will rise after Spring Festival

08:52, January 26, 2011      

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China raise benchmark interest rates next month to tackle inflation and curb liquidity, economists said yesterday.

The central government has made inflation a policy priority and another interest rate increase looms, said Lu Zhengwei, an Industrial Bank senior economist.

"Another interest rate increase and another reserve requirement ratio increase are both expected in February," Lu said.

He forecast an inflation rate of 5.3 percent this month, which he said would push policy makers to increase rates.

Benchmark rates were raised twice in the last three months of 2010 due to rising inflation.

The one-year benchmark deposit rate rose to 2.75 percent from 2.5 percent while the one-year benchmark lending rate jumped by the same 25 basis points to 5.81 percent.

However, the de facto savings rate is still negative considering the 3.3 percent growth in the Consumer Price Index last year. The CPI reached 4.6 percent last month.

The cost of living showed no signs of dropping in the short term as economists expect higher inflation in 2011.

"Inflation is getting out of hand as food and residence costs are increasing," said Dariusz Kowalczyk, senior economist of Credit Agricole. "The central bank should try to achieve positive deposit rates in real terms."

He said he expects the savings rate to increase at least 75 basis points this year on the one-year deposit rate, with larger increases for longer terms.

Most economists agree that the tightening measures will be rolled out in the first half of this year to kill inflation worries.

China shifted its monetary policy from relatively easy to prudent this year on concerns of credit-driven inflation.

The central bank has raised the reserve requirement rate seven times since 2010, with one coming earlier this month, and economists have predicted more tightening.

About 4 trillion yuan (US$606 billion) was withdrawn from the money market last year through six reserve requirement increases.

Banks in China extended 7.95 trillion of new yuan loans in 2010.

Source: Shanghai Daily
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