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Interest rate hike remains uncertain
By Song Quan (China Daily)
Updated: 2004-08-16 09:43

Prospects of an interest rate hike remain unclear although two major influential factors in making a decision have changed.

But the balance seems to have shifted slightly to the "no" side because domestic inflation appears to be easing.

The US Federal Reserve last Tuesday raised its benchmark rate by a quarter of a percentage point -- the second such increase in six weeks -- to 1.50 per cent.

This is good news for those who support an interest rate rise in China. Without a US rate rise, a Chinese rate hike may spur inflow of hot money  speculative short-term funds  which would put appreciating pressure on China's currency, the yuan.

A figure issued by the government statisticians also seemed to strengthen the case for a rate rise.

The National Bureau of Statistics last week released the latest consumer price index (CPI), the key barometer for inflation. CPI rose 5.3 per cent year-on-year in July after registering a 5 per cent growth in June. The July figure equals China's one-year lending rate and immediately reminded people of news reports quoting officials from the People's Bank of China (PBOC) as saying that they would take action once CPI reached 5 per cent or the inflation-adjusted interest rate, or the real interest rate, was moving into negative territory.

Responding to inquiries by news media, a PBOC spokesman said central bank officials had never commented about what situations or conditions would jack up rates.

Economists said the situation should not be judged only by the yearly changes. Consumer prices are actually 0.2 of a percentage point lower than those of June and it is the third month that monthly changes has been negative.

"This shows inflationary pressure is peaking," said Qi Jingmei, a researcher with the State Information Centre.

"So (with the declining monthly price figure) the possibility of an interest rate rise is actually smaller."

The PBOC also provided a favourable prediction of movement of consumer prices.

In its monetary policy report published last week, the central bank said that CPI might peak during the July-September period, but would begin to dip during the final three months of the year.

The government has taken a series of measures since the second half of last year to curb investment growth.

The central bank has also been selling short-term bills as part of open-market operations to mop up funds from the banking system.

The PBOC monetary policy report said the government's macro adjustment measures were doing the job. "Uncertain and unhealthy factors in the economy have been contained," it said.

In fact, some other figures released last week also showed a cooling economy in July. Industrial output, producer prices and money supply all went down.

Those who are against an interest rate rise fear that an increased interest rate would have a negative impact on consumption and sectors that are in real need for investments.

"The central bank's open market operations will be more effective than changing interest rates in controlling credit growth," a commentary in the China Securities Journal said.

But it admitted that an interest rate cut would not be absolutely impossible in the second half of the year.

So far, the achievements in macroeconomic adjustments are still initial ones, it said.

Fixed asset investment and enterprise commodity prices' tendency to growth remain. Supply in coal, oil, electricity and transportation still can not meet demand.

"So if the structural problems become serious again, the use of the interest rate as a tool should not be ruled out," the commentary said.

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