Mainland rates likely to rise, says adviser

Reuters in Shanghai Feb 02, 2010

The mainland might increase interest rates once consumer inflation exceeds the one-year benchmark deposit rate of 2.25 per cent, a prominent government adviser said yesterday. Policymakers have traditionally been nervous whenever inflation-adjusted bank deposit rates turn negative in case savers pull their money out of the bank and put it into assets such as property and shares."

The mainland might increase interest rates once consumer inflation exceeds the one-year benchmark deposit rate of 2.25 per cent, a prominent government adviser said yesterday. Policymakers have traditionally been nervous whenever inflation-adjusted bank deposit rates turn negative in case savers pull their money out of the bank and put it into assets such as property and shares.Ba Shusong, a senior research fellow at the Development Research Centre, a think tank under the State Council, said Beijing could raise interest rates ahead of the United States Federal Reserve to dampen inflationary expectations at home.But it still not known whether China will just raise deposit rates or both deposit and lending interest rates, Ba said. The one-year lending rate stands at 5.31 per cent. The People's Bank of China controls both the deposit and the lending rate.Many economists have argued that Beijing would not raise interest rates before the Fed because a premium in China's favour could result in stronger capital inflows. But Ba said capital inflows may not be as great as expected if higher borrowing costs cooled the property sector.China's consumer price index rose 1.9 per cent in the year to December. Economists expect inflation to accelerate in coming months, but Jiao Jinpu, a researcher with the central bank, said price pressures were unlikely to be fierce enough to trigger a rate rise in the first quarter.Turning to the yuan, Ba said there is a heated debate among researchers on whether China should let the currency rise. Beijing is likely to take a cautious approach to exchange rate policy, especially as the export sector is still weak, he added."

The mainland might increase interest rates once consumer inflation exceeds the one-year benchmark deposit rate of 2.25 per cent, a prominent government adviser said yesterday.
Policymakers have traditionally been nervous whenever inflation-adjusted bank deposit rates turn negative in case savers pull their money out of the bank and put it into assets such as property and shares.

Ba Shusong, a senior research fellow at the Development Research Centre, a think tank under the State Council, said Beijing could raise interest rates ahead of the United States Federal Reserve to dampen inflationary expectations at home.
"But it still not known whether China will just raise deposit rates or both deposit and lending interest rates," Ba said.

The one-year lending rate stands at 5.31 per cent. The People's Bank of China controls both the deposit and the lending rate.
Many economists have argued that Beijing would not raise interest rates before the Fed because a premium in China's favour could result in stronger capital inflows. But Ba said capital inflows may not be as great as expected if higher borrowing costs cooled the property sector.

China's consumer price index rose 1.9 per cent in the year to December. Economists expect inflation to accelerate in coming months, but Jiao Jinpu, a researcher with the central bank, said price pressures were unlikely to be fierce enough to trigger a rate rise in the first quarter.

Turning to the yuan, Ba said there is a heated debate among researchers on whether China should let the currency rise. Beijing is likely to take a cautious approach to exchange rate policy, especially as the export sector is still weak, he added.