Immediate interest rate rise unlikely

By Dong Zhixin (
Updated: 2007-02-13 17:45

China's central bank officials have played down the possibility of immediate interest rate rise amid growing speculations that rising inflation may force regulators to take action.

Reining in excess liquidity is a priority of Beijing's monetary policy, however, interest rate hike can hardly play such a role under current conditions, said Vice Governor Wu Xiaoling in a signed article in Monday's People's Daily.

Yi Gang, assistant governor of the People's Bank of China answers online questions on  Tuesday February 13, 2007. []
And, Assistant Governor Yi Gang said the current interest rate level is "appropriate" and in line with the overall economic and financial macro control goals. "We will keep on watching the upcoming developments of the market and make timely adjustments," Yi said while fielding online questions on, a site for China's central government.

The government's macro control has achieved visible effects, with the commodity prices being kept at a low level and rapid growth of investment being slowed down, Wu said in her article.

The fight to control the huge amounts of cash flowing into the financial system has been waged mainly by absorbing funds through bond and bill issuances, and by raising the amount of money banks need to put in reserves, according to the vice governor. 

Analysts saw this article a possible indication that central bank will not resort to interest rate tool as the market expectations for a rate hike are increasing over rising inflation. 

But Yi said this was a misinterpretation. "Her point is that the priority is reining in the excess liquidity."

China's CPI, a key measure of inflation, surged 2.8 per cent year-on-year in December, the biggest increase in two years. Consumer prices rose 2.6 percent in January from a year earlier, according to the median estimate of 22 economists surveyed by the Bloomberg News.

Pledging to curb inflation, Yi Gang believed the consumer price growth fueld by grain price rise was not sustainable. "China has had a bumper grain harvest for three years in a row. The influence of grain price on CPI may be temporary." 

Besides CPI, the central bank will also monitor other indicators, such as the producer price index, the retail price index and export and import price indices, as well as investment, said Yi.

He revealed that the central government has set a target of 3 per cent for this year's CPI growth, which he called "attainable" and "very mild".

On liquidity, the vice governor reiterated that there is only a little bit of excess liquidity and far less than people thought. "But that will not hinder the central bank's strengthened efforts in reining in liquidity."

China's central bank has raised interest rates twice and increased banks' reserve requirements four times since last April. Banks now must set aside 9.5 percent of deposits after a half-percentage-point increase on January 5.

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