Top banker: Inflation likely to fall in Q2

Updated: 2008-05-06 11:58

Inflation in China is likely to moderate in the second quarter this year, but uncertainty still remains, said China's top banker on Monday.

Zhou Xiaochuan, governor of the People's Bank of China, the central bank, made the remarks on the sidelines of the annual conference of the Bank for International Settlements in Basel, Switzerland.

The Consumer Price Index (CPI), a barometer of inflation, jumped to a 12-year-high of 8.7 percent in February, before easing slightly to 8.3 percent in March.

Zhou attributed the February surge to seasonal factors, mainly the Spring Festival shopping spree. Snowstorms which crippled transportation and disrupted supplies also added to the inflationary pressure.

Zhou predicted the headline inflation will ease in the second quarter, as market supplies increase.

However, great uncertainties remain due to the big fluctuations in food and commodity prices, including oil, minerals, according to the banker.

In face of the inflationary pressure, Zhou would not rule out the possibility of further interest rate hikes, while saying the central bank has tools other than interest rate.

Actually, Zhou's agency has made more use of exchange rate as a tool to fight inflation.

China's yuan has appreciated 4.5 percent against the dollar in the first quarter, the fastest rise since China dropped its peg to the greenback in July 200. In theory, a more expensive yuan will reduce the cost of imports, thus help lower the overall price level.

However, the appreciation slowed down gradually in April, up 0.38 percent against the dollar, as the country's exports dropped substantially.

The trend of the RMB exchange rate will be decided by the market demand and supply, Zhou told the reporters in Basel.

Many economists have suggested the central bank hold on yuan revaluation in order to protect China's export industry. Increasing numbers of plants in southern and eastern China are being forced to close because of the precipitous gains of the yuan.

The rapid yuan rise also draws huge inflows of hot money, a major source of concern for regulators. The influx of speculative cash will add to the inflationary pressure, lead to asset bubbles, and increase the financial risks.

Zhou said his agency is closely monitoring the capital inflow, but he did not expect a severe impact on the country's monetary policy, as China's economy is large in scale.

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