Zhou doesn't rule out rate rise to tame prices

By Nipa Piboontanasawat  |   2008-7-1  |     NEWSPAPER EDITION

ZHOU Xiaochuan, the governor of the People's Bank of China, said he can't rule out an interest-rate increase to curb inflation near a 12-year high.

"It's always possible, we don't exclude any possibility," Zhou told reporters yesterday in Basel, Switzerland, where he's attending a meeting of the Bank for International Settlements.

The central bank's pledge of a "tight" monetary policy this year to prevent the world's fastest-growing major economy from overheating has yet to translate into even one rate increase after six in 2007. The government wants to avoid attracting more foreign capital into an economy already flooded with cash.

"We've been hearing this tough talk for more than half a year, so credibility is at stake," said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong. "They should back words with action." He predicts three increases this year, Bloomberg News said.

China's key one-year lending rate is at 7.47 percent, and the deposit rate is 4.14 percent. Inflation was 7.7 percent in May and the pace for the first five months was the fastest since 1996.

Zhou's comment that raising rates is "always possible" echoes similar statements in March and April. China's CSI 300 Index of stocks has tumbled 48 percent this year on concern that a global slowdown and measures to tame consumer prices will hurt economic growth and profits.

Zhou said the central bank can also sell bills to soak up cash and order banks to set aside more money as reserves, a requirement that's already at a record 17.5 percent.

"We anticipate that in summer, because of a good harvest and some supply-side policy, inflation, especially food inflation, could slow down a little bit," Zhou said on Sunday. "However, we know that global prices of energy and commodities may put extra pressure on inflation."