China studying new interest hike option: Zhou

By Li Zengxin (
Updated: 2007-12-13 16:43

China is currently studying the option of another possible interest hike as its next move to further tighten monetary policy, but a combined policy pack may be needed to curb inflation, said Zhou Xiaochuan, governor of the People's Bank of China (PBOC) yesterday.

Zhou said at a news briefing on the sidelines of the Third China-US Strategic Economic Dialogue (SED) held in Beijing yesterday that surging domestic consumer prices and recent US interest rate cuts would have a "considerable influence" on Chinese monetary policy. PBOC would "seriously consider" the situation, he said.

The rising consumer price index (CPI) has been mainly driven by soaring food prices. Whether and how the CPI could be curbed through monetary policy was being studied, Zhou said, admitting that the issue could be contentious. Simply cutting back on the money supply and lifting the currency price (by interest rate hikes) might be insufficient, he said.

China's consumer price index (CPI) for November rose 6.9 percent from a year earlier, according to statistics released from the National Bureau of Statistics on Tuesday morning. Food prices rose 18.2 percent last month over November 2006.

As to the recent interest rate cuts by the US Federal Reserve, Zhou said China is concerned with possible indirect effects that could diminish the effectiveness of China’s monetary policy.

Secretary of US Department of the Treasury Henry M. Paulson, leading the US delegation to the Strategic Economic Dialogue (SED), yesterday urged China to enhance the elasticity of the renminbi's exchange rate. In response to US requests for faster appreciation, Zhou said both countries need to adjust their policies to address the imbalances between the pair.

On top of enhancing foreign exchange rate elasticity, the Chinese side needs to enlarge domestic demand, further develop the services sector, and adjust energy prices. At the same time, the US needs to exert some efforts from its own side, including enlarging resident savings and reducing excessive consumption, the central bank chief said.

The yuan central parity exchange rate hit a new high today of 735.68 yuan per $100, the 78th time it has broken a previous record this year.

Zhou said that China backed a strong dollar and would also back US efforts to recover from the sub-prime credit crisis, because a weak greenback would worsen the world’s excessive liquidity situation, which could add more pressure to China’s inflation.

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