Top planner adds weight to view that CPI will exceed 3pc target

PUBLISHED : Tuesday, 10 July, 2007, 12:00am
UPDATED : Tuesday, 10 July, 2007, 12:00am

Mainland inflation will rise faster than the government's 3 per cent target this year amid growing concerns the economy is overheating, a senior official with the country's top planning agency has warned.

The remarks, published in the People's Daily yesterday, mark yet another official forecast that the consumer price index will accelerate faster than the government's comfort zone, strengthening the case for further interest rate rises.

The newspaper quoted an official in charge of the price department at the National Development and Reform Commission as saying the CPI in the first half will rise 3 per cent from a year ago. For the full year, the official predicted inflation would top 3 per cent, without stating a figure.

The government is targeting inflation this year to stay below 3 per cent. In the first five months of the year, the CPI rose 2.9 per cent from a year earlier, up from the 1.5 per cent for the whole of last year.

There is increasing concern that the inflation rate will exceed targets as runaway growth fuels higher prices, particularly for food.

The State Information Centre has forecast a 3.3 per cent rise while the research bureau of the People's Bank of China predicts consumer inflation at 3.2 per cent.

Many forecasters revised their predictions following the release of strong economic data for May. Economists said they expected the government to introduce further tightening measures in an attempt to rein in costs.

Qu Hongbin, chief China economist with HSBC, said the central bank needed to raise interest rates to keep real deposit rates in positive territory. The central bank has lifted borrowing costs twice this year.

Morgan Stanley raised its inflation forecast to 2.9 per cent from 2.5 per cent while Goldman Sachs said it expected annualised inflation to top 4 per cent in the third quarter.

'We expect tighter monetary policy in the coming months given heightened inflation risks and negative real interest rates,' said Hong Liang, chief China economist with Goldman Sachs. Ms Liang expects the central bank to increase lending and deposit rates twice before the end of the year, by 27 basis points each time.

The National Bureau of Statistics is scheduled to release key economic data for the first half next week.

The commission official said growth was being driven by increasing domestic costs, rising grain prices in international markets and price rises in eggs, meat, poultry, milk and edible oils.

Premier Wen Jiabao recently warned about the danger of rising food prices, saying they could spark unrest and urged officials 'not to lower their guard' on the issue.

A spike in pork and egg prices helped push the consumer price index up 3.4 per cent year on year in May, the highest inflation rate in 27 months. Food prices, which make up a third of the CPI, rose 8.3 per cent year on year in May.