Chinese inflation is moving near the five percent rate seen as a possible trigger for an interest rate rise, the government said on Wednesday, even as it reiterated that economic cooling measures were yielding results. The State Development and Reform Commission, a powerful agency that sets economic goals and approves key projects, said there had been no decision to raise rates and urged caution over such a move. "I think the price level will be around five percent (higher than a year earlier) this month," commission spokesman Cao Yushu told reporters after a news conference. Officials have said that if consumer price inflation exceeded five percent they might have to raise interest rates. It was 4.4 percent in the year through May, the fastest in seven years, as prices for grain and fuel surged. The benchmark one-year bank lending rate is now at 5.31 percent while the one-year deposit rate is at 1.98 percent.
China's economy is the world's sixth biggest and has become a driver for the global economy. The government wants to slow the economic expansion, which reached 9.8 percent in the year through the first quarter, without prompting a hard economic landing. The government has taken a raft of measures, including raising bank reserve requirements and curbing investment in red-hot sectors such as property and steel, to slow torrid growth in fixed-asset investment and credit. Chinese officials have touted reports of slower growth in fixed-asset investment, factory output and money supply in the year through May as signs of early success. Premier Wen Jiabao said on Tuesday he was confident of engineering a soft landing. "The economic situation is generally sound and macroeconomic measures taken by the central government have already showed obvious results and unstable and unhealthy elements in the economy have been contained," the commission said in a statement. "Despite the results achieved, there are still some striking constrictions and problems in the economic operation." But the agency warned fixed-asset investment growth was still fast and the pressure for prices to rise remained strong. A rise in interest rates would be the first such move in nearly a decade.
PRUDENT ON RATES
Cao said consumer prices would probably rise in the third quarter before cooling off in the fourth quarter. "There is still no decision on whether to raise rates. We will study it in a prudent manner," he said. "There is a wide range of factors that influence interest rates and any adjustment of interest rates will also have a wide impact." Central bank officials have cautioned that higher yuan interest rates could spur capital inflows and put upward pressure on the yuan currency, which Beijing has pledged to keep stable. The development agency also warned of the strain on the country's energy infrastructure due to inadequate supply of coal, oil and power and pledged to speed up the pace of adding power generation capacity. "It will be an enormous challenge to meet the peak demand for power this summer," it said. The government has set a goal of slowing growth to an annual seven percent this year from around nine percent in 2003 and put the economy on to a more sustainable footing.//