China to be cautious on interest rate rises

Updated: 2011-03-23 15:08
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HONG KONG - China is facing strong inflationary pressure, but will tread cautiously in raising interest rates, said Yi Gang, a deputy governor with the People's Bank of China.

Yi told a business conference in Hong Kong on Wednesday that he was confident the government would be able to keep annual average consumer price inflation to 4 percent this year.

"We will see high (inflation) numbers in the first half of the year because of the base effect. Inflation in the second half will be lower," Yi said. "So for the whole year, we will be able to meet the 4 percent goal."

Chinese inflation topped expectations at 4.9 percent in the year to February, near its fastest level in more than two years, and looks set to accelerate further in coming months as the economy races ahead and prices of food and commodities such as oil remain high.

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The deputy central bank chief said he was "comfortable" with current interest rate levels, adding that raising them too high would attract hot money inflows.

So far, the central bank has relied mainly on quantitative tightening measures, notably hiking banks' reserve requirements, to mop up excessive liquidity in the economy.

It has raised interest rates three times and bank reserve requirements six times since October, most recently on March 18. The government has also used a series of direct controls to cap price rises.