China’s Central Bank an- nounced on the night of April 5 that it would raise RMB’s benchmark interest rates from April 6， the second time for it to raise interest rates this year and the fourth time since last October when this round of rate hike was launched.After adjustment， financial institutions’ one-year deposit rate and oneyear lending rate will both see a rise of 0.25% to 3.25% and 6.31% respectively. Besides， benchmark deposits and lend- ing rates for other grades as well as lending rate for individual housing common reserve fund will also be adjusted accordingly.Since early 2011， the Central Bank has raised for three times the RMB deposit reserve requirement ratio(RRR) of the deposit-taking financial institutions. The RRR for large financial institutions now stands at 20% and that of the small and medium-sized ones 16.5%.Economists hold that the Central Bank’s rate hike this time aims at preventing inflation， indicating that the March CPI may surprise to the upside with a year-on-year rise of over 5.2%. However， the upward CPI is mainly caused by carryover effects and inflation may hit an all-time high in the midyear， which signals that this round of rate hike is nearing an end.Interest rates are predicted to rise once again in the second quarter (Q2)， but if inflation can be kept in check in the second half of this year， the odds for another rate hike are slim and the Central Bank will return to open market operations as its major control measures.“We predicted at least two rate hikes in the first half of this year， but the hike this time comes earlier than expected. We forecast earlier that China’s Central Bank would only raise interest rates once again in May or June when inflation picks up，” said Wang Qing， Asia-Pacific Chief Economist at Morgan Stanley.The hike this time suggested that the March CPI might see a higherthan-expected year-on-year rise of 5.2% predicted by Morgan Stanley and that the Chinese government had confidence in sustaining its economic growth， Wang added.According to Lu Zhengwei， a senior economist with Industrial Bank， the rate hike this time is primarily caused by the fact that the Purchasing Managers Index (PMI) signals a slightly weaker month-on-month rise in the future economic growth， but a worrying economic decline is unlikely to happen. China will register an around 9.5% economic growth in Q1， demonstrating a generally upward trend. Another cause for the hike is the current unremitting inflationary pressure.In the international market， the crude oil price remains above US$ 100 and the World Food and Agriculture Organization has also predicted that the food price may remain high in future; as for the domestic market， we predict the CPI will rise around 5.2% year on year in March， a new high for this round of inflation.At present， inflation is still the fundamental factor to determine policy trend. Due to the considerable carryover effects in March， institutions widely predicted a fresh high of CPI for that month. Among the 22 institutions surveyed by WIND， the average predication of CPI rise in March was 5.2% and Mizuho Securities posted the highest of 5.5%-6.0% and Minsheng Securities the lowest of 4.6%-4.8%.Hong Yuan Securities predicted a 5.2% year-on-year rise in CPI and 7.5% in PPI. The implementation of a series of control measures have contributed to a drop in food price， leading to a 0.4% month-on-month decline in CPI. But the incidents in Libya and Japan have pushed up again the prices of production means and bulk commodities， and the upward crude oil prices will result in a 0.9% month-on-month rise in PPI.Experts hold that as CPI has fallen back in March and illusionary inflation is caused by carryover effects and structural factors， the Core CPI is supposed to be released as soon as possible.In the mean time， the production data that policymakers concern is not that optimistic. Statistics released on April 1 showed that after a third decline in a row， the PMI climbed to 53.4% in March， up 1.2 percentage points month on month. The buoyant PMI in March demonstrated some seasonal characteristics， analysts said. Compared with that of the previous years， the rise this time is more moderate， which needs to be maintained for steady economic growth.Since 2005， the average PMI has gone up 3.5% in March month on month with a weaker seasonal rebound over the previous year， said Jiang Chao， an analyst with Guowai Junan Securities. The milder rebound of PMI than expected is contributed by weaker demand， in particular the domestic demand. But the unshrinking production led to a record high of increase in product inventory in March.Supposing the present finished product inventory remains high yet the current large reserve of raw materials begins to decrease in future， the risk to reduce stock with drastically diminish- ing production is likely to loom in May.After the hike this time， the threepronged severely tight policy portfolio in Q1 is expected to be replaced by moderately tight policies， but the effect needs to be observed， said Ba Shusong， Deputy Director of the Research Institute of Finance under the Development Research Center of the State Council， when asked about the future policy trend in an interview with Economic Information Daily.Interest rate policies are implemented along with the tight policies and the interest rate for non-governmental financing reports a sharper rise， which will greatly support the objective to rein in inflation， Ba added. But this will on the other hand impact on the development of some small mediumsized enterprises and hi-tech enterprises. Various indexes prove that the tight policy is taking effect and after the summer grain harvest in late Q2， food price will begin to drop， which will lead to another slight adjustment of the tight policies.Li Xunlei， Chief Economist with Guotai Qunan Securities， predicted another rate hike in Q2， but if inflation is then controlled the hike is unlikely to happen. The Central Bank is to end this round of rate hike， Li added. The termination of rate hike is to avoid a vicious cycle of RMB appreciation—hot money influx—inflation—another rate hike. Moreover， as the RRR has reached 20%， the Central Bank will turn to open market operations as its major monetary tools.“We predict another rate hike in the first half year， to be exact， in May or June. At the same time， as growth of money and credit supply has considerably slowed since the beginning of this year， inflation will reach its annual peak in mid 2011，” said Wang Qing.According to Lion Fund， commodity price will be still under great upward pressure in Q2， and the rate hike this time targets at easing inflation. Inflationary pressure is predicted to become alleviated in the second half year， as the room for rate hike will become smaller and smaller in future.(Author: from Economic Information Daily)
