Interest rates stay put

08:56, September 14, 2010      

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By Li Jianlin

Domestic and international economic climates have rendered it almost impossible for China to hike its interest rate, despite the 22-month high of inflation in August in the country, said Ba Shusong, a government researcher.

"Raising the interest rate is not a matter only of the consumer price index (CPI) itself, we also need to take into account larger picture of the world and domestic economies," said Ba, a deputy director of the Financial Institute of the Development Research Center under the State Council, a central government think tank.

Ba spoke on the sidelines of the on-going World Economic Forum, also known as "Summer Davos," held in Tianjin.

Ba noted that major economies are continuing a comparatively loose monetary policy in the foreseeable future and China's economy is also sliding.

"These two factors have greatly restricted the space for any interest rate hike," he said.

China's August CPI released Saturday hit a 22-month new high of 3.5 percent, putting the one-year benchmark deposit interest rate in a negative territory for the seventh straight month and sparking widespread worries of spiraling inflation.

Last week, local media quoted China's central bank governor as saying that a zero deposit interest rate would make it too easy for Chinese commercial banks to earn money and render them inactive to serve the economy. His words were widely interpreted as a hint for a rate hike in the near future.

Ba told the Global Times, however, a negative real interest rate alone is not an adequate reason for a hike. He noted that China's real interest rates had slipped into a negative territory in one-third of the time for the past two decades, sometimes as low as minus 15 percent.

"As long as the negative interest rate does not induce a sharp change of the capital flows in the market, it won't support any significant interest rate hike," he said.

The benchmark one-year deposit interest rate now stands at 2.25 percent in China.

Apart from a low probability of interest rate hike, the money supply in the second half will also be relatively easier than the first half, Ba said.

"Relative to the 2.2 trillion yuan ($325.88 billion) in the new loans for the second half of last year, the new loans for the second half this year will be 2.9 trillion ($429.57 billion), a comparatively easy position taken by the central bank," he said.

But Cheng Siwei, the former vice chairman of the standing committee of the National People's Congress, is taking a much dimmer outlook on China's inflation.

"An interest rate raise is imperative," he said.

Source: Global Times


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