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Central bank may raise interest rates to curb price rise

By Xu Shenglan (chinadaily.com.cn)
Updated: 2008-04-01 14:21

"Although the nation's economy remains stable and is enjoying rapid growth, greater pressure on rebounding fixed assets investment and excessive credit growth has cast significant pressure on prices," according to the central bank's monetary policy committee yesterday.

The committee said that curbing soaring prices was the focus of macro-control in the financial sector this year. To meet this end, the government would adopt comprehensive measures to increase supply and stabilize expectations.

Affected by rising food prices and the snow disaster, China's consumer price index (CPI) grew to record highs in the first two months this year. The committee forecast that the March CPI growth would see a limited decline, but still as high as eight percent.

According to some experts, the notion of "stablize expectations" implied that the central bank might raise interest rates in the near future. "Compared with issuing bank notes, or raising reserve requirement ratio, an interest rate hike is more effective in stabilizing inflation expectations," said Guo Tianyong, director of China banking industry research centre at Central University of Finance and Economics.

A recent report from Bank of China also considered an interest rate hike necessary, although the ongoing inflation is more of a structural one.

The central bank also said that it would continue to improve the managed floating exchange rate system, and enhance the flexibility of the RMB exchange rate.

In the first three months of this year, cumulative RMB appreciation is 50 percent higher than last year.