China will hold off from raising interest rates because inflation remains below 5 percent and policy makers want more time to assess the effectiveness of measures taken so far to cool an investment boom, central bank Governor Zhou Xiaochuan said. ``We need further observation,'' Zhou said after a speech to a financial conference in Beijing. Li Yang, a member of the People's Bank of China's monetary policy committee, said Monday the bank may raise interest rates if inflation accelerates to more than 5 percent.
The central bank is concerned that an inflation rate higher than the one-year lending rate, currently 5.31 percent, may exacerbate price rises by encouraging companies to borrow and stockpile materials for profit. Consumer prices rose 3.8 percent from a year earlier in April, their biggest gain in seven years. ``It's possible that the consumer price index may rise to 5 percent in the next two months as SARS depressed consumer spending last year,'' said Ma Jun, an economist at Deutsche Bank AG in Hong Kong, who forecasts a 0.5 percentage point increase in the benchmark one-year lending rate. ``For long-term loans, such as the 10-year loan rate, the increase may be higher.'' The central bank is trying to curb money supply and credit growth to help cool runaway spending in industries such as steel, cement and real estate. China's investment in factories, roads and other fixed assets jumped 43 percent in the first quarter, straining raw materials supplies and stoking inflation. China's benchmark seven-year bond maturing in November 2010 was unchanged at 91.8931, yielding 4.99 percent, at 11:17 a.m. in Shanghai. The index of government bonds traded on the Shanghai stock exchange fell 0.03, or 0.03 percent, to 93.19.
`Stable Policy'
The inflation rate may approach 5 percent in the three months starting in May because of the effect of the severe acute respiratory syndrome epidemic in the comparable months, central bank Vice Governor Wu Xiaoling said in an April 27 interview. The consumer price index will reach 4.5 percent in June and 5.8 percent in July, Qu Hongbin, an economist at HSBC Holdings Plc in Hong Kong, said in a research note. He forecasts a 0.5 percentage point rate increase before early July. The central bank's benchmark one-year lending rate was last raised in July 1995. The bank said last week it will keep monetary policy ``appropriately tight.''
The government ``will continue to carry out a stable and healthy monetary policy to prevent inflation and financial risks,'' Vice Premier Huang Ju said at today's conference. Huang also said the government will keep the yuan ``basically stable at a reasonable and balanced level,'' repeating a form of words used frequently by China's leaders to damp speculation of a revaluation. The yuan has been pegged at about 8.3 to the dollar since 1995. ///www.bloomberg.com