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Economists divided on interest rates rise

0 CommentsPrint E-mail Shanghai Daily, June 15, 2011
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Economists?are divided over whether an interest rate increase will follow yesterday's announcement that inflation in May reached 5.5 percent, a 34-month high.

May's economic data indicates that the overall economy is moderating with both industrial production and retail growth softening slightly, but investment demand remains stubbornly strong.

Industrial production growth was better than expected at 13.3 percent. Retail sales grew 16.9 percent, down from April's 17.1 percent. Fixed-asset investment grew 25.8 percent from a year earlier in the first five months.

M2, the broadest measure of money supply, grew 15.1 percent in May, the slowest since November 2008. May loans also fell to 551.6 billion yuan (US$85 billion), indicating that tightening is taking effect.

Some economists said the central bank should not hold back its tightening policy as the May economic data indicated persistent inflationary pressure amid a soft landing of economy.

The People's Bank of China responded to the data by announcing its latest rise in the reserve requirement ratio, the sixth this year. Big banks will face a record 21.5 percent requirement from Monday.

On interest rate increases, market views are divided.

Some said the May figures show that there has been limited deceleration in domestic demand and it was the possibly temporary supply-side issue and the export sector that dragged on overall growth.

"The current inflation situation in China still presents a big challenge for policy makers," said Yao Wei, a Societe Generale economist.

"A prudent central bank should not back down in such a situation. We think the data makes a strong enough case for the People's Bank of China to hike interest rates within this month."

ANZ's Liu Ligang said he expected two more interest rate increases this year - one this month, and the other in the third quarter.

Citibank economists said another rate increase can come this month or in July.

On the other hand, some cautioned that over-tightening could hurt economic activity while inflation is expected to be tamed in the second half after peaking in the middle of the year.

Jing Ulrich, chairwoman of global markets at JPMorgan, said it may take at least two quarters for interest rates to take effect, meaning that the previous rate increases may bear fruit in the second half.

Lu Zhiming, a Bank of Communications researcher, said that there would be fewer rises in interest rates and reserve requirement ratios in future, considering the slowing of economic growth, the high cost of credit and the shrinking of new loans.

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