Survey: What if interest rates were raised?

15:20, June 03, 2010      

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Amid the public concerns, and much to the dismay of the citizens, inflation expectations are approaching to the harsh reality. Many new terms are coined to describe the situation and the enlarging affected groups, such as "slaves to vegetables" or "slaves to fruits".

China should raise benchmark deposit rates as a defensive move to stabilize inflation expectations, a central bank adviser said in comments published on Wednesday.

Zhu Baoliang, chief economist at the State Information Center (SIC), predicted that the country's Consumer Price Index (CPI) will reveal a year-on-year growth of 3 percent in May.

CPI will remain high in June and July, and will show a downward trend in the second half of 2010, as monetary policies may tighten, said Zhu. "China's CPI growth for the whole 2010 may exceed 3 percent."

More worrisome than the 2.8 percent rise in consumer prices in the year to April was the 0.2 percent month-on-month increase, said Li Daokui, an academic adviser on the central bank's monetary policy committee.

"This indicates that price trends are extremely serious, requiring a high level of attention," he told the Beijing Morning Post.

Li is one of three academic advisers to the People's Bank of China, a position which gives him knowledge of official thinking but little influence over policy decisions.

A professor at Qinghua University, Li has been relatively hawkish since his appointment as an adviser earlier this year, repeatedly saying that the central bank should consider raising interest rates.

In his latest comments, Li said that it was important for the central bank to stabilize savers' and investors' expectations by breaking the trend towards negative real rates.

The benchmark one-year deposit rate is currently 2.25 percent.

Many analysts expect consumer prices to continue to climb in coming months and officials have said that it will be a challenge for China to keep average inflation over the full year below 5 percent.

If the Central Bank decided on raising the interest rates, what effects would be imposed on China's economy and the public livelihood ?


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