Economists expect tight monetary measures to continue

By Zhang Fengming  |   2008-6-26  |     ONLINE EDITION

AN EXPECTED slow-down in June inflation is unlikely to lead authorities to relax tight monetary measures, economists said.

Lu Zhengwei, an Industrial Bank chief economist, said he expects June inflation to drop on decreasing food prices and the tail-raising factor.

Lu forecast June inflation to fall within the range of 6.9 to 7.6 percent.

Inflation in May fell to 7.7 percent from 8.5 percent the month before.

However, recent fuel and electricity price increases may also affect inflation in following months, thus forcing authorities to continue with the tight monetary policies, he said.

"Though the commercial electricity price is unchanged, the increase in industrial power prices will sooner or later translate into a living cost increase and add uncertainties on inflation," Lu said.

The central government raised refined oil prices on Friday. The price of gasoline and diesel will increase by 1,000 yuan a ton while aviation fuel prices rose 1,500 yuan a ton.

The government will also increase commercial and industrial electricity prices by an average of 0.025 yuan a kilowatt-hour.

"The tight monetary policy won't change in the third quarter," said Lu. "Quantitative measures and appreciation of the yuan may still be the main monetary measures in the third quarter."

His view was echoed by Bian Xubao, a Qilu Securities Co analyst.

Bian expects first-half inflation of 8 percent and June inflation of 7.7 percent.

"Quantative measures will still be the main tools, though a coming interest rate cut can't be ruled out," said Bian.

Bian also expected corporate profits to slow due to rising raw material costs.

The People's Bank of China has already increased the reserve requirement ratio to a 23-year high of 17.5 percent. It was the fifth time the ratio was lifted this year.

Zhang Xu yang, deputy general manager of retail banking at China Everbright Bank, also said the tight monetary policy is unlikely to be eased in the short term.

The National Statistics Bureau is scheduled to post June's consumer price index, the main inflation gauge, on July 14.