Officials retreat from stance that 5pc inflation would trigger an increase The People's Bank of China appears to have shifted its position on interest rates, backing away from an earlier vow to increase rates if inflation rose above 5 per cent this month. Mu Huaipeng, the bank's head of research, was quoted in state media yesterday as saying officials needed to analyse inflation trends for June, July and August before making a final decision on rates. Last month, People's Bank of China (PBOC) governor Zhou Xiaochuan said he would raise rates if inflation exceeded 5 per cent this month. Statistics released last week showed the government's economic slowdown policies were taking effect, but the seasonally adjusted consumer price index (CPI) still rose from 3.8 per cent to 4.4 per cent from April to May. The rise in the CPI prompted economists to express fears that interest rates would be increased even while the economy was slowing, hurting the private sector, which already has a difficult time getting bank loans. 'The PBOC says no more tightening steps until the CPI gets to 5 per cent - this was mentioned in an offhand way in a speech,' said a report released yesterday by independent analyst Donald Straszheim, a former chief economist for Merrill Lynch in New York. 'Five per cent has become the real target - and the central bank has to act or lose credibility. It has painted itself into a box.' However, in comments reported yesterday, Mr Zhou seemed to back away from the remarks, telling state media he was happy with how May statistics showed the government's policies were working. 'Our focus is to continue to manage through policy adjustments,' he said, without mentioning interest rates. Mr Mu said the central bank would adjust interest and exchange rates, and other pricing mechanisms only when it was necessary. 'It's a complicated issue and we can't just raise interest rates without careful consideration. We have to look carefully at price movements before we make a decision,' he said. 'However, if we do raise rates, we will steadily adjust them downwards over time as we gradually introduce more market mechanisms.' Mr Mu also admitted 'inflation rose because we didn't allow our currency to revalue'. His remarks were the first by a senior official publicly admitting that the mainland's fixed exchange rate was the root cause of the nation's asset inflation problem. In the past, officials blamed over-zealous property investors and foreign speculators. However, Mr Straszheim said he did not believe China's economy was overheated. 'China is trying to slow a rampaging 9 per cent plus economic growth rate to what they regard as a more sustainable 7 per cent pace,' he said.