Inflation may hold close to two-year high

Updated: 2007-02-12 09:14

China's inflation probably held close to an almost two-year high on food prices, increasing the likelihood of the central bank raising interest rates.

Consumer prices rose 2.6 percent in January from a year earlier, according to the median estimate of 22 economists surveyed by Bloomberg News. That would be down from 2.8 percent in December, the biggest increase since February 2005. The statistics bureau will release the figures at 10 a.m. on Feb. 14.

"The probability of an interest rate raise in the coming few months has increased and a second rate hike is also possible this year," said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong. Besides accelerating inflation, he cited concerns over a potential stock market bubble and a rebound in investment.

China is trying to prevent the overheating of the world's fourth-biggest economy, which last year expanded 10.7 percent, the fastest pace since 1995. An export boom drove a US$177.5 billion trade surplus that is pumping cash into the financial system.

Economists surveyed by Bloomberg News last month expect the central bank to raise interest rates and curb bank lending in the first half. The one-year benchmark lending rate is 6.12 percent.

Central bank Governor Zhou Xiaochuan is seeking inflation of less than 3 percent this year. Food accounts for a third of the consumer price index.

Grain Prices

Corn futures on the Dalian Commodity Exchange jumped 25 percent in 2006 as soaring demand swallowed a record harvest. The world's most populous nation may struggle to meet its grain needs as farmland shrinks amid rapid urbanization, the Ministry of Agriculture said Jan. 26.

"Unless the government has massive food stockpiles to dump on the market that we are not aware of, we may see prices soar even higher in the months ahead," said Carl Weinberg, chief economist at High Frequency Economics Ltd. in New York.

The inflation figures will be affected by the timing of China's Lunar New Year holiday which fell partly in January last year. Chinese people buy extra food for holiday feasts.

M2, the broadest measure of money supply which includes cash and all deposits, probably grew 16.5 percent in January from a year earlier, the Bloomberg News survey showed. The central bank will release the figures as early as Monday.

Producer prices likely rose 3 percent in January from a year earlier, the survey showed. The statistics bureau will release the figures tomorrow.

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