Expect further increases in interest rates, say analysts

PUBLISHED : Tuesday, 20 March, 2007, 12:00am
UPDATED : Tuesday, 20 March, 2007, 12:00am

Analysts expect the mainland's central bank to raise interest rates and introduce other tightening measures in the coming months because they view the weekend's rate increase as far from enough to rein in overheating fuelled by excessive liquidity in the banking system.

The People's Bank of China raised interest rates for the third time in less than a year on Saturday, a day after Premier Wen Jiabao warned of risks still facing the economy. The 27-basis-point increase in both one-year deposit and lending rates took the benchmark one-year deposit rate to 2.79 per cent and the one-year lending rate to 6.39 per cent.

The adjustment followed the release of figures last week showing surprisingly high credit growth during the first two months of the year.

Interest rate increases and other measures have managed to cool investment in factories, real estate and other fixed assets somewhat, allowing Mr Wen to claim a partial victory in the fight against economic overheating.

However, in his news conference at the conclusion of the annual National People's Congress session on Friday, Mr Wen said the economy still faced serious problems from rapid investment, fast credit growth, excessive liquidity and a huge trade surplus.

'Investment growth is too high, credit and lending is too much, liquidity is excessive and trade and international payments are not balanced,' Mr Wen said.

Most economists expect economic growth to remain strong in the coming months, encouraging further tightening.

'The rate hike will help curb excessive credit growth and soaring property prices,' said Ha Jiming, chief economist at China International Capital Corp.

The central bank also raised interest rates in April and August and last month ordered banks to set aside more money as reserves for the fifth time in eight months to rein in the supply of money.

Hong Liang, chief China economist with Goldman Sachs, described the latest rise as still 'far from where the neutral policy stance should be' and said the yuan's rise so far, including its initial revaluation, was not enough for China to regain its independence to set monetary policy. She expects another 27-basis-point rate rise in June or July, and a rise of 7 per cent in the yuan against the US dollar over the next 12 months.

Qu Hongbin, chief China economist with HSBC, said the increase should send out a clear signal that the central bank was worrying about a fresh spurt in credit, industrial production and inflation.

Inflation accelerated to 2.7 per cent year on year last month, up from 2.2 per cent in January. 'More needs to be done to bring credit growth under control, and the most likely measures in the coming months include two to three increases in reserve ratios, issuing PBoC bills to those banks who lend out aggressively at a punitive rate ... and another 27-basis-point rate hike,' Mr Qu said.

Jun Ma, chief economist for greater China with Deutsche Bank, noted the timing of the announcement on Saturday night.

'The fact the PBoC chose not to delay the rate hike for another week signals its desire to tighten policy in a most timely manner, to prevent further acceleration in loan/investment growth and help contain inflation.'