China's inflation likely hit 8.3 percent in February: bank
2 days ago
BEIJING (AFP) — China's inflation likely hit a new 11-year high of 8.3 percent last month on the back of rising food prices, state media reported Sunday, triggering speculation of a modest hike in interest rates.
Severe winter weather which crippled transport networks, and the Lunar New Year festival which traditionally brings a surge in demand, were also seen as helping drive up the price of food and other basic commodities.
The estimate of 8.3 percent was given by the Bank of China, the country's second largest lender, and reported by the state news agency Xinhua.
It came ahead of Tuesday's publication of official inflation data from the National Bureau of Statistics, which is used by authorities to decide whether to tighten monetary policy.
The consumer price index, or CPI, had already risen 7.1 percent in January from a year earlier, the highest since September 1996.
"Everybody knows it's going to be more than eight percent in February. Logically, February's CPI must be higher than January's," said Chen Xingdong, Beijing-based chief economist with BNP Paribas Asia.
In its report, the Bank of China said February's increase in the consumer price index was fuelled mainly by food, which rose more than 22 percent from a year earlier, according to Xinhua.
"Making things worse... when people expect prices to keep rising, they will spend more to avoid those future rises, which in turn will push prices up," it reported, quoting the bank.
The effect of the freezing weather across much of China was first felt in January, but the main impact was in February, BNP Paribas Asia's Chen argued.
The Lunar New Year, the biggest consumption fest of the Chinese calendar, also came in February, adding upward pressure on the price of everything from firecrackers to plane tickets.
China's inflation is seen as triggered mainly by the relative scarcity of basic products, such as pork and other staple food items.
According to observers, this leaves economic policy-makers with a dilemma when opting for the right response, even though the central bank governor said last week there was "definitely room" for more interest rate hikes.
If he does raise interest rates -- the classic response to rising inflation -- he could deter producers of these basic commodities, so making the problem worse.
Another problem is that since early 2007 China has hiked its interest rates six times, while the US Federal Reserve has steadily lowered them.
As a result, the spread between the two has widened dramatically, with the benchmark US federal funds rate now at 3.00 percent compared with 7.47 percent for China's one-year lending rate.
Chinese policymakers fear that a big gap between Chinese and US rates will attract more speculative funds into the economy, fuelling liquidity that is already considered too high.
"If the government wants to hike the rate, it won't be by too much. It will mainly be a gesture, a symbolic move," said Zhang Taowei, an economist from Tsinghua University.
China's economy, the fourth largest in the world, expanded by 11.4 percent in 2007, its fifth consecutive year of double-digit growth.
While inflation was kept in check in the first four years of that phase of expansion, one of the trends in 2007 has been price hikes reaching levels not seen for a decade.
The Chinese government's paramount concern over inflation is seen as partly because its Nationalist predecessor regime was defeated after hyper-inflation contributed to an erosion of its legitimacy.
"The current price hikes and increasing inflationary pressures are the biggest concern of the people," Premier Wen Jiabao told 3,000 lawmakers at the start of parliament's annual full session last week.
"We have to take into consideration the ability of individuals, enterprises and all sectors of society to tolerate price increases and try our best to avoid sharp price increases," Wen said.
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