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Central Bank Deliberates Interest Rate Rise

The central bank is under pressure to raise interest rates to combat price increases, but the international economic situation could influence its decision, an adviser to the bank said yesterday.

"Interest rates in China are relatively low but prices are relatively high," Fan Gang, a member of the People's Bank of China's monetary policy committee, was quoted as saying by the People's Daily.

"Some short-term deposit rates are still negative in real terms, which means there is pressure to raise interest rates," he said.

The central bank raised interest rates six times last year and increased banks' reserve requirement ratio -- the proportion of money they must hold in reserve - 10 times to cool the economy and curb inflation.

But growth of the consumer price index (CPI), a bellwether of inflation, is widely expected to rise above 7 percent for January, beating the previous 11-year high of 6.9 percent reported in November.

Soaring food and fuel prices caused by the severe weather in central and southern provinces that cut transportation and damaged crops are behind the expected high CPI growth, as is the strong consumption mood ahead of the Lunar New Year.

The latest monetary supply figures also indicate a need to raise interest rates. The supply grew much faster in January as the central bank pumped cash into the financial system ahead of the country's Spring Festival holiday. M2, the broad measure, rose 18.9 percent from a year earlier, compared with 16.7 percent in December.

Zhao Xijun, a finance professor at Renmin University of China, said: "The situation in January is special."

Many companies will have paid bonuses to their staff and investors might also have been paid their dividends, he told China Daily. "This has led to more liquidity," he said.

Despite the pressure to raise interest rates, Fan said in an open global economy, China's monetary policymakers must consider other factors in deciding whether to make the move.

As the US has recently cut interest rates to prevent its economy from sliding into a recession and China raised interest rates six times last year, the opposite interest rate movement risks ushering in more speculative capital into China, analysts have said.

Fan also ruled out a one-step revaluation of the yuan, saying it is "not a choice that will benefit stable economic development".

(China Daily February 15, 2008)

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