MercoPress. South Atlantic News Agency

Fearing inflation China tightens credit and absorbs liquidity

China's Central Bank cautioned it's ready to raise the interest rate as early as late March to check inflation, which may surge as high as 8.7% in the twelve months to February. As a consequence of the recent blizzards that destroyed crops, food prices this month could jump 6 to 7 percentage points over January.

According to a Central Bank report housing prices, which account for 14% of China's consumer price index (CPI), the main gauge for inflation, will also keep rising for a period of time. Faced with this situation the bank believes higher interest rates instead of an appreciation of the Yuan could be a better way out to tackle inflation in the long run. Higher rates should not attract hot money inflows from overseas "given China's strict control on capital account". The People's Bank of China (PBOC) Deputy Governor Ma Delun confirmed the bank would continue to implement a tight monetary policy to rein in inflation. China's CPI soared to 4.8% in 2007 and jumped to 12 months high of 7.1% in January. The National Development and Reform Commission (NDRC), the country's top economic planner, has set a 4.8% CPI target for 2008, from 3% in 2007, but following the spell of extreme winter weather "the target has become formidable", admitted NDRC Deputy director Zhou Wangjun. However US investment bank Goldman Sachs has lifted its forecast of China's inflation this year to 6.8% from 4.5%. The PBOC is tightening policies this year by further raising the deposit reserve requirement ratio and conducting more open market operations, said Ma. On Jan. 25, the PBOC, to absorb excess liquidity, raised banks reserve requirement ratio by 0.5 percentage points to 15% the highest since 1984. Last year, it raised the ratio 10 times and the benchmark interest rates six times. This week it issued 115 billion Yuan (16.1 billion U.S. dollars) of central bank bills, lifting the total amount over the past three weeks to more than 400 billion Yuan. Ma said he is hopeful these measures will help contain inflation growth. "The government decided to shift its monetary policy to "tight" from "prudent" at the 2007 Central Economic Work Conference in December last year, in a bid to prevent evident inflation and economic overheating", revealed the bank's deputy governor. The Yuan gained almost 9% against the US dollar in the past year, helping to lower prices of imports and curb economic growth by reducing demand for the nation's exports. China is "confident" of being able to curb inflation, Ma Delun underlined.