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China likely to hike interest rates again in 2nd quarter

(XFN-Asia)
Updated: 2007-03-20 14:27

China's central bank is likely to raise interest rates again in the second quarter, after it announced a 27 basis points increase in the benchmark one-year deposit and lending rates on Saturday, Standard Chartered said.

In a research note, Standard Chartered said the central bank's next move will be data-dependent and probably will not come for some time, but it expects another hike of 27 basis points towards the end of the second quarter.

Inflation is seen rising in China over the coming months due to higher food prices and possible liberalization of utility prices.

There is also likely to be a rebound in fixed-asset investment, Standard Chartered said.

"We expect the central bank to raise its benchmark rate again by the same magnitude late in the second quarter," the brokerage said.

"This will also help to curb investor enthusiasm in the stock market, which the central government is not totally comfortable with," it added.

Credit Suisse economist Dong Tao agreed that another hike is likely this year.

"Tightening measures could escalate at around mid-year, if the consumer price index exceeds the three percent ceiling and the stock market becomes overly speculative," he said.

But Lehman Brothers economist Mingchun Sun said he did not expect further rate hikes this year, though the central bank is likely to take other policy tightening measures.

"The People's Bank of China may be expecting CPI inflation and economic growth to moderate later, despite a very strong start in 2007. We also expect CPI inflation to fall sharply in the fourth quarter, after peaking at around 3.0 percent in July, thus we expect the central bank to stay (keep benchmark rates) on hold over the rest of 2007," Sun said.

He added though that CPI inflation is likely to pick up in 2008, and this should prompt two further rate hikes next year.