Chinese Premier Wen Jiabao (溫家寶) signaled for the first time that China would struggle to meet its 4 percent inflation target this year, underlining expectations that interest rates will rise further even as economic growth slows down.
Wen, who is traveling in Europe, was quoted by Hong Kong media yesterday as saying that while he sees the Chinese economy growing above 8 to 9 percent this year, it was hard for China to keep inflation under 4 percent this year.
“China’s financial situation will still be among the best in the world this year, with economic growth kept above 8-9 percent, and CPI [consumer price index] controlled under 5 percent,” Wen told Hong Kong television media during the England leg of his Europe tour.
Wen’s latest comments sounded somewhat less sanguine than his remarks on Friday, when he said China’s inflation was firmly under control this year and should cool steadily. However, they might not alter investors’ thinking about monetary policy.
Many economists had assumed China would overshoot its 4 percent target given that the inflation rate has stayed well above that mark since January, and is expected to peak at 6 percent this month or or next month.
Inflation rose last month to a 34-month high of 5.5 percent.
Economists polled by Reuters this month predicted China would stay in a tightening mode, raising its benchmark lending rate by one-quarter of a percentage point and its deposit rate by a half-point this year.
The central bank has made clear that its focus is squarely on inflation.
It raised banks’ required reserve ratio to a record 21.5 percent earlier this month, hours after last month’s inflation data was released. The higher reserve ratio means banks have less money available for lending, which policymakers hope will help to cool growth and inflation.
China is keen to keep prices in check to preserve social -stability. Food and energy prices have been the primary culprits behind the steep inflation rate, and that tends to hit lower-income households the hardest.
The economy grew 10.3 percent last year and in the first quarter that pace eased to 9.7 percent.