The People's Bank of China may have to rethink its commitment to tighten monetary supply, in the wake of the US Federal Reserve's aggressive slashing of its key rate in an emergency meeting on Tuesday. Just two weeks ago at its annual work conference, the central bank vowed to carry out policies outlined by the State Council to curb inflation, using tools such as higher interest rates and higher bank reserve ratios. After the Fed made the biggest cut in its fed funds rate in two decades, reducing it 75 basis points to 3.5 per cent, it is open to question as to how much room is left for the PBOC to work the screws on the economy. The Federal Reserve is widely expected to cut the key interbank lending rate another 50 basis points when it meets next week, a scenario that would widen the spread on interest rates between the mainland and the United States to more than 100 basis points. The country's one-year deposit interest rate stands at 4.14 per cent after six increments last year. This negative spread would allow the PBOC little room to raise rates for fear of fuelling more inflows of hot money, analysts said. 'Any meaningful rate hike by the central bank would only lead to an increase in speculative inflows and offset the intended tightening effect of a higher rate,' said Qu Hongbin, chief economist at HSBC China. Adding to the problem, mainland stock markets saw panic sell-offs on Tuesday and any rate increase would only knock the already fragile investor sentiment, said Zhou Dunren, economics professor of Shanghai-based Fudan University. 'It's a choice between bad and worse,' said Zhuang Jian, an economist at Asian Development Bank. Mr Zhou said: 'The central bank would be cautious in rolling out any policies for fear of further hurting the capital market, which is closely related to social stability in the Olympic year.' The consumer price index, expected to have climbed about 4.8 per cent last year, might ease a bit when supplies of agricultural products and pork picked up in the second half, he said. 'A slowdown on CPI would offer policymakers a comfortable reason to stay put in the second half of the year,' he said, predicting two rate rises in the first half. The central bank, on the other hand, may still have reasons to raise interest rates as policymakers seem to have reached a consensus making curbing inflation a top priority. Mr Zhuang said the PBOC would 'give priority to fighting inflation and cooling the economy [as the] closed financial system can block inflows of hot money to a large extent'. He predicted at least four rate raises in the first half as the economy rides the momentum of last year's overheating. Stephen Green, research head of Standard Chartered, said political factors also figured considerably in any rate increase. After a government reshuffle in March, banks will be forced to finance more state projects as new public posts are filled. 'Bank rates have to rise,' Mr Green said. 'Otherwise, as soon as loan growth is relaxed, we will simply see an explosion of lending, asset price inflation and inefficient investment.' All analysts agree that the central bank will have to show more flexibility to adjust to market changes.