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Inflation likely to have hit 8.3% in Feb: Bank of China

Reports of bank’s estimate trigger speculation of interest rate hike

(BEIJING) China’s inflation likely hit a new 11-year high of 8.3 per cent last month on the back of rising food prices, state media reported yesterday, triggering speculation of a modest hike in interest rates.

Severe winter weather which crippled transport networks, and the Chinese New Year festival which traditionally brings a surge in demand, were also seen as helping to drive up the price of food and other basic commodities.

The estimate of 8.3 per cent was given by the Bank of China, the country’s second largest lender, and reported by the state news agency Xinhua.

It came ahead of tomorrow’s publication of official inflation data from the National Bureau of statistics, which is used by authorities to decide whether to tighten monetary policy.

The consumer price index (CPI) had already risen 7.1 per cent in January from a year earlier, the highest since September 1996.

‘Everybody knows it’s going to be more than 8 per cent in February. Logically, February’s CPI must be higher than January’s,’ said Chen Xingdong, Beijing-based chief economist with BNP Paribas Asia.

In its report, the Bank of China said that February’s increase in the CPI was fuelled mainly by food, which rose more than 22 per cent from a year earlier, according to Xinhua.

‘It is making things worse . . . when people expect prices to keep rising, they will spend more to avoid those future rises, which in turn will push prices up,’ it reported, quoting the bank.

The effect of the freezing weather across much of China was first felt in January, but the main impact was in February, BNP Paribas Asia’s Mr Chen argued.

Chinese New Year, the biggest consumption festival of the Chinese calendar, also came in February, adding upward pressure on the price of everything from firecrackers to plane tickets. China’s inflation is seen as triggered mainly by the relative scarcity of basic products, such as pork and other staple food items.

According to observers, this leaves economic policymakers with a dilemma when opting for the right response, even though the central bank governor said last week that there was ‘definitely room’ for more interest rate hikes.

If he does raise interest rates – the classic response to rising inflation – he could deter producers of these basic commodities, so making the problem worse.

Another problem is that since early 2007, China has hiked its interest rates six times, while the US Federal Reserve has steadily lowered them. As a result, the spread between the two has widened dramatically, with the benchmark US federal funds rate now at 3 per cent compared with 7.47 per cent for China’s one-year lending rate.

Chinese policymakers fear that a big gap between Chinese and US rates will attract more speculative funds into the economy. – AFP

Source: Business Times 10 Mar 08

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