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Economists divided over interest-rate increases
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Economists are divided on whether the central bank will increase interest rates in the first quarter to fight snowstorm-fueled inflation.

Economists widely expect higher inflation in January and February amid the worst snowstorms in five decades and the seasonal demand during the Spring Festival which started on February 6.

Though China is set to announce its January consumer price index today, a higher figure for the inflation gauge is already expected. Deutsche Bank's Ma Jun expects a January CPI of 7.3 percent and a February figure of 7.8 percent, and inflation may even exceed 8.0 percent in March. Citibank's Shen Minggao expects January inflation of 7.2 percent.

The consensus on higher inflation won't necessarily trigger an immediate interest-rate increase, some researchers said.

Lu Zhengwei, an Industrial Bank analyst, said the possibility of interest-rate rises has receded because of the snowstorms' impact on the economy. "An interest-rate increase is a weapon to fight inflation which will cast an impact on all industries," Lu said. "Certain industries need support from loans after the snowstorm, eliminating chances of such a rate rise."

It will also take time to see the effect of the six interest-rate increases last year, he said.

Li Maoyu, a Changjiang Securities Co analyst, also noted an interest-rate rise was unlikely this month, despite higher inflation. Monetary policies like raising the reserve-requirement ratio for banks and some temporary pricing intervention moves were more likely, Li said.

However, others still expect more rate rises, including Citibank's Shen and Standard Chartered's Stephen Green, who expect four more hikes this year.

China's strong exports growth in January may delay any easing of a tight monetary policy, Shen said. China's January exports grew a faster-then-expected 26.7 percent, indicated that China's trade pattern has not been affected sizably by slowing external demand and the quickened pace of yuan appreciation in recent months. "Liquidity management and its potential impact on inflation could remain top of the government's agenda," Shen said.

"We still hold the view that there could be one more rate rise in the first quarter," said Shen. "The main reason is due to the widening gap between the deposit rate and inflation."

Deutsche Bank's Ma noted that raising interest rates twice within the next three months for three CPI new highs in the first quarter still appears a quite reasonable policy compromise for the central bank.

(Shanghai Daily February 19, 2008)

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