The mainland's benchmark interest rates need to rise by at least 50 basis points to control inflation and cut excessive borrowing, according to ratings agency Fitch Ratings. Raising rates should be part of a wider package of monetary tightening, including further increases to the reserve requirement ratio, James McCormack, head of Asian sovereign ratings, told Fitch's annual global banking conference in Beijing. 'Interest rates have to go up,' Mr McCormack said. 'Negative real interest rates send the wrong signals,' pointing to a close correlation between the growing supply of money and 12-year-high inflation. With the current one-year lending rate set at 7.47 per cent, more than 1 percentage point below monthly consumer price inflation, real lending rates remain deep in negative territory. This encourages companies and individuals to borrow excessively, pushing up money supply and stoking inflation. Fitch forecasts two 27 basis-point interest rate rises this year - the first since December - and two additional reserve ratio increases to 18.5 per cent. With inflation expected to moderate in the second half, a 50 basis-point rise would be enough to push interest rates into positive territory. Ministry of Commerce data suggests that average food prices last month were 3.5 per cent lower than in April, putting last month's year-on-year consumer price inflation at 7.7 to 8 per cent, according to an estimate by Morgan Stanley. However, in pushing up domestic interest rates, the central bank faces the dilemma of encouraging more investors to take advantage of lower borrowing rates abroad. Some economists reckon that capital inflows have already overtaken trade earnings in recent months. Raising the cost of domestic borrowing would also hit manufacturers, already reeling from weaker demand from key export markets. David Marshall, Fitch's chief Asia bank analyst, warned that a prolonged period of negative real rates would 'end unhappily one way or the other' for mainland lenders, which still lack the expertise to price loans to reflect credit risk. 'The real concern is overcapacity in the property sector; there is just so much development that is empty. This could turn out to be dormant non-performing loans,' said Fitch China bank analyst Charlene Chu.