China may delay rate hike to H2

Morgan Stanley said in a report that the People's Bank of China, the central bank, may raise the rate in the second half rather than in the first six months as it previously projected. Deutsche Bank AG predicted a single 27-basis-point move this year, from a previous forecast of two to three increases.

Although the Consumer Price Index, the main gauge of inflation, rose to an 18-month high of 2.8 percent in April -- and has been above the benchmark one-year deposit rate for three consecutive months -- it was mainly driven by surges in food costs that a simple interest rate hike would not be able to address, said Li Maoyu, an analyst at Changjiang Securities Co.

"The inflationary pressure will become mild in the future, as the effect of a low comparative base fades and there are fewer natural disasters," Li said. "The central government is more concerned about the world economic trend now. The decision makers are closely following issues like the kind of damage that the European sovereignty debt crisis may bring to the world economy."

The central bank has kept the one-year lending rate at 5.31 percent and the deposit rate at 2.25 percent after trimming them in late 2008 to counter the influence of the global financial crisis, which led to a slump in exports.

Raising the interest rate is a double-edged sword. If China raises the rate immediately, it would mop up market liquidity and prevent the economy from overheating.

But if Europe, the biggest market for Chinese exports, sees a drop in consumption and demand, China will suffer a double whammy and its growth would be hit, analysts said. The 27-member European Union is China's largest trading partner.

(Source: ShanghaiDaily.com)