China likely to raise rates if inflation tops 5 percent: report

By @ibtimes on

Chinese inflation will probably rise more than 5 percent in the year to March, pushing the central bank to raise interest rates, an official newspaper said on Tuesday.

Although the government has made progress in taming price pressures, the combination of a low base effect, high global commodity prices and rising service costs will push inflation toward three-year highs in the coming months, the China Securities Journal said in a front-page commentary.

Analysts believe there is quite a big possibility that March CPI broke through 5 percent. As this would clearly make for negative real interest rates, the window for raising rates would again open, the newspaper said.

China has raised interest rates three times since October, when it began its current monetary tightening cycle in earnest. Analysts polled by Reuters expect a further two rate increases in the first half.

The China Securities Journal does not necessarily reflect official policy, but as one of the country's leading financial newspapers, it does have a reasonably good track record in forecasting policy moves.

Benchmark one-year deposit rates are set at 3 percent. There is a concern that if inflation remains above that level for a sustained period, companies will over-invest since the cost of capital is so low and depositors will take their money out of banks, leading to asset bubbles.

Consumer price inflation could continue to grind up toward 6 percent year on year in June and July, the newspaper said. It was last that high in mid-2008.

April and the middle of the year will be sensitive windows for raising interest rates, it said.

(Reporting by Simon Rabinovitch; Editing by Ken Wills)

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