China May Continue to Raise Interest Rates to Curb Inflation: Experts

People’s Bank of China an- nounced on the night of April 5 that it would raise financial institutions’ benchmark oneyear deposit rate and one-year lending rate both by 0.25 percentage points from April 6 to 3.25% and 6.31% respectively.This is the Central Bank’s second hike this year and the fourth since last year. Insiders regard the mounting inflationary pressure and the continuous negative interest rate as the primary causes for the hike.“The timing of the hike does not surprise the market expectation. In a bid to rein in inflation and a looming asset price bubble， it is very necessary for the Central Bank to decisively raise interest rates，” said Cao Honghui， Director of the Financial Markets Department of the Institute of Finance Banking under the Chinese Academy of Social Sciences.During the first two months this year， CPI remained above 4.9%， posing great pressure to inflation. Li Xunlei， Chief Economist at Guotai Qunan Securities， attributed the rate hike to inflationary pressure.“The Chinese economy is still growing and it will continue to be confronted with great imported inflationary pressure，” said Liu Ligang， General Director for economic research in Greater China of Australia and New Zealand Bank. “The rate hike this time is not a surprise， suggesting that China’s monetary authorities start to use a string of policy tools to reduce the inflationary pressure confronting its macro economy.”Statistics released recently showed that China’s manufacturing Purchasing Managers Index (PMI) in March climbed to 53.4% from February’s 52.2% after having kept dropping in three consecutive months.Insiders hold that in the medium and long run， the unrest in Middle East and North Africa， coupled with Japan’s post-earthquake reconstruction， will exert significant upward pressure on the prices of bulk commodities.Li Huaiding， an analyst at Guosen Securities， said that the maturing bills in the open market amounted to RMB 911 billion in April. Against the backdrop of upward inflationary pressure and adequate liquidity， the enormous amount of maturing bills calls for open market operations to drain liquidity.“As the interest rate of Central Bank Bill has been raised earlier， it is hard for the Central Bank to continue the issuance of bills and to open market operations， while rate hike will help to decrease liquidity via pushing up the interest rate of Central Bank Bill，” Li explained.“The second rate hike this year demonstrates the Central Bank’s reso- lution to curb inflation and signals that its monetary policy is returning to normal in a move to cut negative interest rates，” said Zhu Jianfang， Chief Macro Economic Analyst from CITIC Securities.“What concerns is that the interest rate for current deposits has also been raised， signaling that the Central Bank has strengthened its policy control and it may continue to raise interest rates in future，” said Xu Yilan， International Financial Risk Manager with Bank of Communications in Shanghai.Zhao Qingming， senior researcher of China Construction Bank， believed that as rate hike could only exercise weak control on credit and liquidity， the Central Bank would still resort to such quantitative tools as Central Bank Bill and deposit reserve requirement ratio (RRR) in future. Meanwhile， there is still room for China to raise interest rates before the negative interest rates become positive.Since 2010， China has raised the RRR for nine times to a record high of 20%. This year， in particular， the monetary authorities have implemented tighter policies and the RRR has seen a three-time rise during the first three months.“In the option of monetary tools， raising the RRR is helpful to control liquidity， while rate hike， regulating enterprises’ capital needs via the price lever， contributes to structural adjustment of China’s economy and optimization of resource allocation，” said Cao Honghui.(Author: from Xinhuanet)