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People's Daily Online>>China Business

Rise in interest rates predicted

By Song Shengxia (Global Times)

09:20, January 11, 2012

China is unlikely to reduce interest rates this year and may even raise the rates to combat long-term structural inflation, Citibank said yesterday.

"Although the country's consumer price index (CPI) has dropped in recent months and inflation has been brought under control in the short term, it has not been tackled in the real sense. Problems related to land, salaries, capital and raw materials have not changed, causing costs to rise. The government should raise the interest rate to adjust the economic structure," Oliver Chiu, head of research and investment advisory for the Wealth Management Unit of the Citibank China Global Consumer Group, said at a press conference held in Beijing yesterday.

"There is still scope for China to raise the interest rate this year. In terms of monetary policy, it is more likely that China will use quantitative measures to adjust the money supply. For instance, the reserve requirement ratio may be cut this year," Chiu said.

Citibank's forecast runs contrary to that of other investment banks and economists.

In a report e-mailed to the Global Times last week, Swiss investment bank UBS predicted that there would be no real change in the current interest rate level this year.

Although China's deposit interest rate is still negative and needs to gradually return to the positive range, It is believed the country's central bank will not raise interest rates during this period of the economic cycle. Meanwhile, a cut in the rates would result in unnecessary credit increase to the real economy. It is predicted that the interest rate will not be changed in 2012, according to the report.

Likewise, the Bank of Communications predicted that deposit and loan interest rates will remain stable this year despite the persistence of medium- and long-term inflationary pressures.

"But it is possible that the interest rate will be cut once by 0.25 percentage points if there is a severe impact from external factors," the bank said in its research note.

China raised its interest rates three times last year to tame runaway inflation but concerns about an economic slowdown have intensified in recent months.

The country's purchasing managers index, a gauge of performance in the manufacturing industry, dropped in November below the 50 percent line that divides expansion from contraction, although it returned to above 50 percent in December due to seasonal factors.

The Chinese government will try its best to maintain an 8 percent growth rate in the year, and the focus of policies will shift from anti-inflation to being more prudent, Citibank said.

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