Central bank perplexed raising interest rate

09:20, March 18, 2010      

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China's central bankers are facing perplexing difficulty in determining the next measures to manage a heating-up economy, as residents' inflation expectations have kept rising, but uncertainties abroad often chime in impacting the decision-making.

The sudden jump in the number of CPI (consumer price index) for February, rising 2.7 percent over the same month last year, has caught the bankers in "a little bit surprise" who had forecasted a milder growth of less than 2.2 percent, said Chinese economists.

Zhou Xiaochuan, Governor of the central bank, admitted while answering the China Securities Journal on Monday that the rather steep rise of the inflation, from 1.5 percent in January to 2.7 percent in February – the fastest clip in 16 months – was weighing on the bank's Monetary Policy Commission, which decides on the country's interest rate policies.

To make things worse, February's PPI (producer price index), or inflation at the gate of factories, rose 5.5 percent. That could lead to inflating in the prices of most daily-use commodities and nudge up CPI in the coming months, economists say.

And, a national survey done by the central bank has found that 51 percent of Chinese residents now regard prices of consumer goods as "unacceptably high", the highest such result since the start of the survey in 1999, according a statement on the website of the People's Bank of China.

Public expectations of inflation would continue to rise next quarter, and probably restrain home consumption, said the central bank.

Given the 2.25 percent one-year interest rate on savings, February inflation of 2.7 percent means the real interest rate level has returned to negative for the first time since lat 2008 when the global financial crisis broke out, raising the possibility of an interest rate hike soon.

However, the central bankers are said to be concerned about tepid recoveries so far in Europe, Japan and the United States, China's major trading partners. Uncertainties in Greece's fiscal constraints, and volatilities in Western capital markets and instability in the exchange rates of major currencies, especially between the US dollar and the euro, all weigh on the bankers.

China's Premier Wen Jiabao said on Sunday in Beijing that he was even worried by a "double-dip" – relapse into recession – if major economies do not collaborate and resonate. However, Wen said that China would be well prepared for any abrupt disturbance, given China's enormous capital reserve and improving fiscal performance.

On Tuesday, the US Federal Reserve decided to keep the over-night bank lending rate at near zero for "an extended period" – widely believed to be at least 6 months – so as to give more impetus to a budding recovery there.

The no-change in the Federal Reserve's policy tone will also weigh on Chinese central bankers, whether to raise the interest rate level for China, said analysts, as any hike of the rate will lure more overseas speculative "hot money" to influx to the country, further worsening inflation.

Some analysts have predicted that the People's Bank of China will continue to raise the reserve requirement ratio of big lenders – making them pack more of their received deposits at the central bank – to rein in liquidity and curb inflation. The central bank has twice raised the ratio this year to 16 percent for the major banks.

People's Daily Online

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