International | Feb 15 2007
By Chris Shaw
The People’s Bank of China (PBoC) appears set to lift interest rates further this year as both DBS and Credit Suisse note inflation continues to push higher.
A couple of factors are contributing, DBS noting food prices are moving up as grain prices rise thanks to inefficiencies in distribution and growing demand thanks to the government’s focus on lifting domestic consumption and a shift from agriculture to urbanisation.
This is likely to sustain the upward pressure on food prices in the group’s view, as the indirect effect of higher domestic consumption generally is higher grain consumption, which combined with less land for agriculture will increase the need for grain to be imported and so increase the economy’s exposure to price fluctuations.
This is already being reflected in PBoC commentary, as DBS points out the bank indicated in its 4Q report inflationary pressures were on the rise rather than remaining as in its previous commentary.
As a result the group has lifted its forecast for the CPI for the coming year to 2.8%, up from 1.5% last year. Credit Suisse is forecasting 3.0% for the year, up from 2.0% previously.
The increase also reflects the strength in both the equity and property markets, which the latter notes is resulting in excess liquidity and fuelling asset price inflation. As a result both groups see the government as acting further to bring the inflation situation under control via a number of measures, the most significant likely to be further increases in official interest rates.
Both DBS and Credit Suisse see a further two increases of 0.27% each in coming months. As well, Credit Suisse suggests there is potential for increases in reserve requirements as the Central Bank attempts to mop up excess liquidity, while it also sees price controls as a possibility in an attempt to bring down the CPI reading, if not the underlying inflation rate.
