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Interest rate hike remains uncertain
By Song Quan (China Daily)
Updated: 2004-08-16 09:43
Prospects of an interest rate hike remain unclear although two major
influential factors in making a decision have changed.
But the balance seems to have shifted slightly to the "no" side because
domestic inflation appears to be easing.
The US Federal Reserve last Tuesday raised its benchmark rate by a quarter of
a percentage point -- the second such increase in six weeks -- to 1.50 per
cent.
This is good news for those who support an interest rate rise in China.
Without a US rate rise, a Chinese rate hike may spur inflow of hot money
speculative short-term funds which would put appreciating pressure on
China's currency, the yuan.
A figure issued by the government statisticians also seemed to strengthen the
case for a rate rise.
The National Bureau of Statistics last week released the latest consumer
price index (CPI), the key barometer for inflation. CPI rose 5.3 per cent
year-on-year in July after registering a 5 per cent growth in June. The July
figure equals China's one-year lending rate and immediately reminded people of
news reports quoting officials from the People's Bank of China (PBOC) as saying
that they would take action once CPI reached 5 per cent or the
inflation-adjusted interest rate, or the real interest rate, was moving into
negative territory.
Responding to inquiries by news media, a PBOC spokesman said central bank
officials had never commented about what situations or conditions would jack up
rates.
Economists said the situation should not be judged only by the yearly
changes. Consumer prices are actually 0.2 of a percentage point lower than those
of June and it is the third month that monthly changes has been negative.
"This shows inflationary pressure is peaking," said Qi Jingmei, a researcher
with the State Information Centre.
"So (with the declining monthly price figure) the possibility of an interest
rate rise is actually smaller."
The PBOC also provided a favourable prediction of movement of consumer
prices.
In its monetary policy report published last week, the central bank said that
CPI might peak during the July-September period, but would begin to dip during
the final three months of the year.
The government has taken a series of measures since the second half of last
year to curb investment growth.
The central bank has also been selling short-term bills as part of
open-market operations to mop up funds from the banking system.
The PBOC monetary policy report said the government's macro adjustment
measures were doing the job. "Uncertain and unhealthy factors in the economy
have been contained," it said.
In fact, some other figures released last week also showed a cooling economy
in July. Industrial output, producer prices and money supply all went down.
Those who are against an interest rate rise fear that an increased interest
rate would have a negative impact on consumption and sectors that are in real
need for investments.
"The central bank's open market operations will be more effective than
changing interest rates in controlling credit growth," a commentary in the China
Securities Journal said.
But it admitted that an interest rate cut would not be absolutely impossible
in the second half of the year.
So far, the achievements in macroeconomic adjustments are still initial ones,
it said.
Fixed asset investment and enterprise commodity prices' tendency to growth
remain. Supply in coal, oil, electricity and transportation still can not meet
demand.
"So if the structural problems become serious again, the use of the interest
rate as a tool should not be ruled out," the commentary said.
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