March 15, 2010

As prices surge, China may raise interest rates

BEIJING

China’s inflation spiked higher in February, adding to pressure on Beijing to prevent overheating and keep the recovery in the world’s third-largest economy on track.

Consumer prices rose 2.7 per cent in February over a year earlier, up from January’s 1.5 per cent increase, the National Bureau of Statistics reported March. 11. Driven by a 6 per cent jump in food costs, it exceeded most analysts’ forecasts and came close to the government’s target of 3 per cent inflation for 2010.

A spike in inflation over the past four months is forcing Beijing to divide its focus between boosting growth and preventing overheating. Communist leaders have imposed curbs on bank lending but avoided raising interest rates, which could slow growth and affect China’s trading partners by denting demand for imports.

“There are lots of signs that price pressure is building in the Chinese economy sooner than expected, and that’s going to be a concern for the government,” said Tom Orlik, an analyst in Beijing for Stone&McCarthy Research Associates.

Orlik and others said the inflation data were unlikely to provoke an immediate hike in interest rates. But many expect Beijing to raise rates as early as the next two months as it eases back on its stimulus.

Some doubt China’s efforts to prevent overheating will have any impact on Beijing’s trading partners because its target level for growth should continue to drive demand for imports.

“All these measures about lending controls and rate hikes are to engineer a soft landing,” said UBS economist Tao Wang. “If people are expecting 9 to 10 per cent GDP growth from China, then a rate hike or two won’t change that prospect at all.”

In an illustration of the galloping economy’s effect on prices, the American Chamber of Commerce in Southern China said day its member companies face higher labour costs as they compete with stimulus-financed construction projects for scarce workers.

Associated Press

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