Inflation could lead to rate hike - Central bank chief

By Xin Zhiming (China Daily)
Updated: 2007-06-25 07:17

Interest rates could be raised if inflation pressure keeps building, the central bank governor has said.

If the consumer price index (CPI), a key gauge of inflation, continues to rise, "we don't exclude the possibility of raising interest rates again," Zhou Xiaochuan said on Saturday in Basel, Switzerland, where he was attending a meeting of central bankers at the Bank of International Settlements.

The People's Bank of China raised rates twice this year, with the latest on May 19 when the benchmark one-year deposit rate was raised 27 basis points to 3.06 percent.

The same month, the CPI rose the highest in more than two years - 3.4 percent year on year - as pork and food prices soared. It was the third month this year that the CPI exceeded or nudged the 3 percent mark set by the central bank for this year.

Song Guoqing, a senior economist with the China Center for Economic Research at Peking University, said the June CPI could rise as high as 4 percent due to rapid rises in food prices.

Many economists said the CPI will continue on an upward trend until September or October.

Zhang Yongjun, an economist with the State Information Center, said: "We forecast the CPI will peak at 4 percent around October before it starts to decline."

Dong Dezhi, economist with the Bank of China, said: "We have not seen signs of slow-down in CPI growth in June. It is more than possible that it will continue to rise on the back of the 3.4 percent level in May."

Apart from steep rises in pork and egg prices, prices of aquatic products and fruits have rebounded in June, adding to inflation pressure, Dong observed. Food accounts for about a third of the CPI basket.

While many worry that rising inflation would be inevitable, Zhuang Jian, a senior economist with the Asian Development Bank, said the authorities are well equipped to control inflation following the experience in the 1990s.

The high CPI rates forecast in the coming months presume that there will be no government intervention, he noted.

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