Interest rate hikes 'cannot be ruled out'

Diverse measures could be used to help control inflation, says adviser

The possibility of further interest rate hikes cannot be ruled out this year, if the government is to meet its inflation and money supply targets, an academic adviser to the central bank said on Wednesday.

Qian Yingyi, a professor at Tsinghua University who advises the People's Bank of China, said the economic growth conditions this year will be better than 2012, but that inflation could become an issue due to easing monetary policies worldwide.

"In addition, local governments will be looking to increase their investment spending, with the arrival of the new leadership.

"The PBOC is aware that money supply pressures will be relatively high this year, and therefore it may introduce some control measures in advance," Qian said.

On Tuesday, Premier Wen Jiabao announced the government had set an annual inflation target of 3.5 percent, as measured by the consumer price index, 0.5 percentage points lower than in 2012, and a 13 percent increase in M2, the broader measure of money supply that covers deposits and cash in circulation.

In 2012, CPI rose 2.6 percent, while M2 grew by 13.8 percent, lower than the official target of 14 percent.

Attending a group discussion at the Chinese People's Political Consultative Conference, Qian said it would be difficult for the government to meet both targets set this year.

He added that in recent months concerns over rising prices had prompted the PBOC to use short-term liquidity measures such as reverse repos, instead of the traditional adjustments in interest rates and the reserve requirement ratio.

"When the situation calls for more flexible policy making, short-term operations are much more agile and easier to maneuver."

He noted that short-term speculative capital inflows, or "hot money", had led to an appreciation of the yuan over the past two quarters, adding he expected continued uncertainly over the exchange rate this year.

He added the PBOC is also likely to further broaden the permitted fluctuation range of yuan trading in 2013, but declined to clarify by how much the range should be adjusted.

"The range will be gradually broadened in accordance with market conditions, and there won't be any permanent restraints," he said.