Mon, Aug 21, 2006 - Page 12 News List

China expected to boost rates again this year

APPLYING THE BRAKES Economists at Credit Suisse and Goldman Sachs foresee one more increase of 27 basis points before the end of this year

By Amber Chung  /  STAFF REPORTER

China is expected to raise interest rates once more before wrapping up its tightening policy by the end of this year as it tries to moderate runaway economic growth, Credit Suisse said recently.

To avoid attracting more hot money inflows through fast interest rates hikes that narrow the spread with US rates, China's use of conventional monetary policy tools has to be small and gradual, allowing it to mop up excess liquidity slowly, Credit Suisse's chief Asia economist Dong Tao (陶冬) said in his latest report released on Friday.

Tao anticipated one more rate increase of 27 basis points before the tightening cycle is halted by year's end, provided that the measures show a clear effect, he said.

Last Friday, China's central bank announced it would increase interest rates by 27 basis points, lifting its one-year benchmark lending rate to 6.12 percent per annum and one-year benchmark deposit rate to 2.52 percent per annum.

The announcement marked the second increase in rates this year, and the first for the deposit rate since October 2004.

The increases came after the country last month boosted its reserve requirement ratio by 50 basis points for the second time, in the hope of cooling investment.

"The [increase] in both deposit and lending rates is a much more efficient and credible monetary tightening than a reserve requirement hike or other purely administrative tightening measures," Goldman Sachs' China economist Hong Liang (梁紅) said.

Increased borrowing costs are a much more effective tool to keep investment growth under control, Liang said.

Goldman Sachs also forecasts another hike of 27 basis points in both lending and deposit rates by the end of this year.

Both economists expected China to speed up the appreciation of its currency against the US dollar by widening the daily trading band, as Beijing sees this as another move toward tightening.

Deutsche Bank said earlier this month that it expected the Chinese currency to strengthen by 3 percent to 4 percent, to a level of 7.75 versus the US dollar in the next 12 months.

Since the country's tightening measures are expected to ease economic growth instead of causing a sharp slowdown, Credit Suisse retained its annual GDP forecast for China at 10.5 percent this year and 9.5 percent next year.

Meanwhile, the US is expected to raise its benchmark interest rates once in the autumn after earlier this month deciding to hold interest rates steady for the first time since June 2004, according to Deutsche Bank Group's chief economist Norbert Walter.

The US headline inflation, which exceeded 4 percent last month compared with a year ago, remained too high, Walter said in an address before the European Chamber of Commerce Taipei last Friday.

The US Federal Reserve would hold steady, and then move to cut rates next August once it ascertains inflation is contained, he said.

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