Inflation hits 27-month high in May

By Dong Zhixin (
Updated: 2007-06-14 13:32

China's inflation in May hit the highest level in 27 months on rising pork and food stuff prices, raising the pressure on the central bank to raise interest rates.

The Consumer Price Index (CPI), a barometer of inflation, rose 3.4 percent compared with the same period of last year, the National Bureau of Statistics said Tuesday, beating the three percent target set by the People's Bank of China for this year.

The increase, after a 3.0 percent rise in April and a 3.3 percent growth in March, was mainly driven by surging grain and pork prices. In May, food prices jumped 8.3 percent, while non-food items rose 1.0 percent. Among food products, grain prices rose 5.9 percent.

In May, the price of meat and meat products shot up 26.5 percent, and that of fresh eggs rose by 37.1 percent. But the prices of fresh vegetables and fruits dropped, by 2.3 percent and 11.2 percent respectively, according to the NBS statistics.

A rise in food prices is especially sensitive because it would be felt most strongly in the poor countryside. The NBS said the CPI rise in May in the rural areas was 3.9 percent, and that in the urban areas was 3.1 percent.

Pork prices climbed 43 percent year-on-year in the first three weeks of May, according to official figures released earlier. Food accounts for a third of the consumer price index and meat for seven percent.

The newly-released figure makes May the fourth straight month that saw inflation outpace the benchmark one-year deposit rate, eroding people's purchasing power and making the case for an interest rates hike.

Last week, central bank governor Zhou Xiaochuan said he was "closely" monitoring the rising food costs and will study May's CPI data before any interest-rate change.

"Inflation is breaching the target and putting pressure on the central bank to raise the rates," said Bank of China (Hong Kong) Ltd economist Michael Dai in an interview with Bloomberg News. He expects the central bank to increase interest rates twice more this year.

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

However, HSBC chief China economist Qu Hongbin and CITIC Securities analyst Chen Jijun disagree. They believe rates hikes will not help curb inflation as it is mainly caused by the tight supply of some commodities.

The central bank has raised interest rates twice this year, with the latest coming on May 19 when the benchmark one-year deposit rate was raised 27 basis points to 3.06 percent, while the lending rate for the same period was increased 18 basis points to 6.57 percent.

On the timing of the next rates hike, some analysts expect it to happen before late June as CPI has been hovering at or above three percent for several months.

However, Shenyin Wanguo Securities chief analyst Gui Haoming put the timeframe in July or August. The central bank raised the interest rates just in mid-may and it usually will wait some time to see the feedback before another move, making rates hike in June unlikely, Gui explained.

Qiu Yanying of TX Investment Consulting Co. echoed Gui's points. Qiu expected the central bank to wait until next month's CPI is released before deciding on further interest rates hike.

Stock market

The analysts are divided on the impact of an interest rate rise on the stock market, which is gradually recovering after a series of slumps caused by the stamp tax hike announced on May 29.

The influence on the equity market will be limited, as an interest rates hike was expected, said Gui Haoming.

However, other analysts thought the market is currently at a sensitive period and an increase in interest rates will probably result in wilder fluctuation. They also pointed to the weak performances of banking stocks in the last few days, which they said was caused by expectation of a rates hike.

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