SHARP RISE IN CHINESE INFLATION PUTS PRESSURE ON INTEREST RATES By Richard McGregor in Beijing
Wednesday, September 12, 2007
Pressure grew yesterday for China to raise interest rates sharply in the coming months after inflation hit 6.5 per cent in August, the highest in more than a decade.
Inflation was pushed up from July's 5.6 per cent rate by rapidly rising food prices, which were up 18.2 per cent year-on-year in August, as a shortage of pigs and pork, a staple meat, and higher feed costs buffeted grocery and vegetable markets.
High and rising inflation, particularly when driven by food prices, will reduce the living standards of Chinese workers, threatening unrest unless wage rates rise to compensate.
But wage inflation would risk fuelling more general price inflation, similar in effect to an appreciation of the Chinese currency. In advanced economies, import prices of Chinese goods would rise, complicating the lives of central bankers grappling with the credit squeeze as higher inflation would make it harder to justify interest rate cuts.
In comments last week, Zhou Xiaochuan, the governor of the People's Bank of China, said he would like to see an end to negative real interest rates, a signal of support for more rises in borrowing costs.
One-year deposit rates are only 3.6 per cent and the returns on interest income are taxed, so rising inflation adds an extra incentive to savers to spend money rather than save it or risk it in a dangerously frothy stock market.
Higher interest rates would seek to slow the economy's growth and rein in the inflation rate. The PBoC, which has already lifted interest rates four times this year, is not an independent central bank and any further rate increases must be approved in consultation with Wen Jiabao, the premier.
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