PRC inflation likely reached 8.3% last month, bank says

China's likely hit a new 11-year high of 8.3 percent last month on the back of rising food prices, state media said yesterday, triggering speculation of a modest hike in interest rates.

Severe weather that crippled transport networks, and the Lunar New Year festival, which traditionally brings a surge in demand, were also seen as helping drive up the price of food and other basic commodities.

The estimate of 8.3 percent was given by the Bank of China, the country's second largest lender, and reported by Xinhua news agency.

It came ahead of tomorrow's publication of official inflation data from the National Bureau of Statistics, which is used by authorities to decide whether to tighten monetary policy.

The consumer price index (CPI) had already risen 7.1 percent in January from a year earlier, the highest since September 1996.

"Everybody knows it's going to be more than 8 percent in February. Logically, February's CPI must be higher than January's," said Chen Xingdong (陳興動), Beijing-based chief economist with BNP Paribas Asia.

In its report, the Bank of China said last month's increase in the CPI was fueled mainly by food, which rose more than 22 percent from a year earlier, Xinhua said.

"Making things worse ... when people expect prices to keep rising, they will spend more to avoid those future rises, which in turn will push prices up," it said, quoting the bank.

The central bank governor said last week there was "definitely room" for more interest rate hikes.

If he does raise interest rates -- the classic response to rising inflation -- he could deter producers of basic commodities, making the scarcity of these products even worse.

Another is that since early last year, China has hiked its interest rates six times, while the US Federal Reserve has steadily lowered them.

As a result, the spread between the two has widened, with the benchmark US federal funds rate now at 3 percent, compared with 7.47 percent for China's one-year lending rate.

Chinese fear that a big gap between Chinese and US rates will attract more speculative funds into the economy, fueling liquidity.

Also See: Beijing defends new labor rules