Tue, Jun 29, 2010 - Page 11 News List

China likely to raise interest rates, economist says

By Lisa Wang  /  STAFF REPORTER

China is likely to hike key interest rates by 0.27 percentage points by the end of this year in order to cool down the economy, which may be on the brink of overheating, and to curb escalating inflation risk caused by rising food prices and rising wages, a Beijing-based economist said yesterday.

Chinese monetary policymakers have been cautious about making a fiscal stimulus exit out of concern about unemployment in China and fear that a worsening European debt crisis could cause a double-dip recession.

“[A run-up in] the consumer price index is the most important factor [behind the possible hikes]. Other factors can be managed,” said Huang Yiping (黃益平), a professor at Peking University’s National School of Development, on the sidelines of a speech in Taipei yesterday.

China’s economy grew at an annual rate of 11.9 percent in the first quarter, close to the recent growth rate of 12 percent, which puts the economy under a higher risk of inflation based on the past record, Huang said.

“I believe it will be no exception this time,” Huang said.

China’s CPI, a major indicator gauging an economy’s risk of inflation, jumped to 3.1 percent last month, while the figure was still in negative territory in November last year, Huang said. He said food prices were on the rise, which has caused inflation in the past.

Rising wages have added to the risk, he said. Labor shortages have boosted wages in China by between 15 percent and 20 percent since the beginning of the year, he added.

Huang did not expect to see an end to rising wages anytime soon.

To rein in the risk of inflation, the People’s Bank of China is likely to increase key interest rates by 0.27 percentage points in the second half, Huang said.

Under pressure from the US, China could also allow the yuan to rise faster than it did from 2005 to 2008, Huang said. The yuan appreciated 5 percent to 7 percent annually against the greenback during that period.

That would also push most Asian currencies higher, as many central banks in Asian countries have closely monitored the yuan to safeguard their exporters’ competitiveness, Huang said.

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