Experts divided on another interest rate hike

Updated: 2007-06-13 10:44

Customers walk in a supermarket in Shenyang, in northeastern China's Liaoning Province June 12, 2007. The CPI released June 12 triggers a new round of debates on the possibility of another interest rate hike. [Reuters]
The National Bureau of Statistics on Tuesday announced that the consumer price index (CPI) for May reached 3.4 percent. The figure easily beats the three percent target set by the People's Bank of China for this year and triggers a new round of debates on the possibility of another interest rate hike.

On June 5, China's central bank governor Zhou Xiaochuan said the central bank needs to look at the overall CPI in May to decide whether to raise interest on deposits or not.

Though the CPI increase meets the forecast of investment banks such as HSBC, Goldman Sachs, and Lehman Brothers, these three investment banks do not think China's central bank will raise interest rates to control inflation in the short term.

According to Lehman Brothers, the skyrocketing CPI for May was mainly driven by surging food prices, and this reason is a seasonal factor. If it does not continue, then the central bank does not need to hike interest rates soon.

Liang Hong, chief economist for Goldman Sachs China, echoed the same view. "The central bank just raised interest rates last month, so it may only require commercial banks to set aside more deposit reserves to cool inflation," Liang said.

Related readings:
 Inflation hits 27-month high with CPI up 3.4%
 Another interest rate hike depends on CPI
 China to raise interest rates again - survey

Let interest rates play their role in economy

For a country that has 10 percent economic growth, inflation from three percent to five percent is not a problem, according to a report from HSBC, and the bank believes the central bank will increase interest rates in the future, but not immediately.

However, Li Junjie, economist for the National Development and Reform Commission, has a different opinion. He says the interest rate hike can cool inflation.

Tao Dong, chief regional economist for non-Japan Asia at Credit Suisse, believes another three hikes are needed to reduce inflationary pressures as well as to rein in soaring investment and property prices.

A real estate expert in Guangzhou agrees. Han Shitong also expects the central bank to increase interest rates. "The interest rate hikes put more financial pressure on those with mortgages," he added.

Wu Dingjin, vice project manager of Jingwei Real Estate, also concurs, saying the central bank should raise interest rates to control the CPI and inflation. But he warns this is not good for the real estate industry. "For long term, interest rate hikes will lead to higher housing prices."

Some other Chinese economists also rule out the possibility of another interest rate hike in the short term, but insist that scrapping the 20 percent tax on bank deposit interest would be a better policy option.

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