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Rates may rise next week on high CPI

Rates may rise next week on high CPI

Write: Shakira [2011-05-31]

China may possibly raise interest rates again during the coming Dragon Boat Festival holiday because consumer prices are expected to rise to a new high in May, economists said.

The three-day Dragon Boat Festival holiday, which ends next Monday, may be the time when the People's Bank of China, the central bank, is likely to announce another interest rate increase, UBS Securities Co said in a note.

"Although China's economic growth has shown signs of moderation, inflationary pressure remains high and it pushes China to continue to tighten its monetary policies," the brokerage said.

It estimated the Consumer Price Index, the main gauge of inflation, may surge 5.5 percent in May and then climb to 6 percent in June. The recent droughts in central China may be the reason for food prices to rise and so push up the CPI.

China has lifted interest rates twice so far this year, or four times since October. The one-year benchmark savings rate is now 3.25 percent. Actually the real interest rate is negative because the CPI was 5.3 percent in April and hit a 32-month high of 5.4 percent in March.

Wang Qing, an economist at Morgan Stanley, said last week that China should continue to tighten monetary policies because containing inflation is the top priority.

"China's current relatively prudent monetary policy is a proper choice to deal with inflation," Wang said. He expected the PBOC to raise interest rates in June.

The central bank tends to announce important decisions, like hikes in interest rates or reserve requirement ratio, during holidays or at weekends to minimize any impact on the stock market.