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BOC: Interest rate hike needed to tame inflation

(Xinhua)
Updated: 2008-06-11 19:11

China's government still needs to raise the interest rate following the harsher-than-expected increase to the reserve ratio requirement, amid efforts to effectively curb inflation, according to the Bank of China (BOC).

The government should stick to tight monetary policy and raise the interest rate "at a proper time" to ease inflation, the leading commercial bank said in a research report released on Tuesday.

Rate hikes would help to end negative interest rates to become one of the most effective weapons against inflation, the report noted.

The May 12 devastating earthquake in Sichuan Province would not change economic fundamentals, but the massive investment during the post-quake reconstruction period might add new inflationary pressures, it said.

Some analysts have advocated relaxing monetary policy as the economy faced a worrisome slowdown on weaker export growth and following a spate of disasters from the worst blizzards in five decades earlier this year to last month's magnitude-8.0 quake.

The People's Bank of China (PBOC) has refrained from boosting interest rates this year after six increases last year. The central bank feared that further increases could attract more overseas speculative funds after the sharp rate cuts in the United States.

The PBOC ordered one percentage point rise in the reserve requirement ratio on Saturday, the fifth such move this year, to enhance liquidity management and tame inflation.

The consumer price index (CPI), the major gauge of inflation, rose 8.5 percent in April, up from 8.3 in March and down from the 12-year high of 8.7 percent in February.

Many analysts have forecast that the CPI would slow considerably in May, mainly because of declines in food prices. The BOC predicted the CPI might have risen 7.7 to 8 percent last month.

The official reading was scheduled to be released on Thursday.

The producer price index, another measure of inflation, accelerated to 8.2 percent in May, after gaining 8.1 percent in April, the National Bureau of Statistics said Wednesday.

This, however, sparked worries the CPI might rebound later this year as producers could pass the higher costs on to consumers.

With difficulty on reaching consensus on rate hikes, the PBOC would use more bill sales, reserve ratio increases and administrative intervention to curb credit growth and inflation, the report noted.

The BOC added the post-quake investment boom would drive the economy to grow 10.5 percent while the trade surplus would shrink to $180 billion in 2008.

Last year, the economy expanded 11.9 percent and the trade surplus rose 48 percent to $262.2 billion.