Economists are divided in their opinions over the Chinese central bank's interest rate moves to fight the nation's rising inflation and also on whether the United States Federal Reserve will cut its rates even more.

 

Some economists expect less frequent interest rate increases this year by the Chinese side amid expectation of more cuts in US rates, thereby squeezing the Chinese central bank's room to use interest rate to fight inflation.

 

Citigroup now thinks that the People's Bank of China will raise its rate just one more time this year, a drop from its earlier forecast of two to three times, said Huang Yiping, its chief Asia economist, yesterday.

 

The central bank may turn to liquidity management through reserve requirement ratio increases and open market operations, Huang said.

 

The expectation of more interest rate cuts by the Fed on concerns the US may enter recession is one driver for the revised forecast by Citi.

 

The Fed on Tuesday slashed its federal funds rate by three quarters of a percentage point to 3.5 percent in an emergency reduction and indicated further rate cuts were likely.

 

The US rate is already lower than the one-year benchmark deposit interest rate in China of 4.14 percent.

 

Huang expects the Fed will cut the rate to 2.5 percent, or even further, this year as the Fed fights, what many people think is, a lurking economic recession.

 

This rate cut will help lure more funds to China in search of higher returns, attracted by an appreciating yuan, and squeezing the room for the central bank to use interest rate to fight inflation.

 

China's consumer price index, the main gauge of inflation, advanced 4.8 percent in 2007 from a year earlier, outstripping the government's three percent target.

 

But Stephen Green, a Standard Chartered senior economist, said he expects four more bank interest rate rises by the Chinese central bank, totaling some 100 basis points, this year, concentrated in the first half.

 

"For this loan slowdown to be sustainable, bank rates have to rise, especially on deposit side - otherwise as soon as bank loan growth is relaxed we will simply see an explosion in loans, asset price inflation, and inefficient investment," he said in a note.

 

"Moreover, we do not believe an additional 100 basis point is a significant attraction to trigger significant inflows of foreign exchange," Green said.

 

(Shanghai Daily January 25, 2008)