The People's Bank of China, the country's central bank, said it will use multiple tools, including the interest rate, to improve monetary control and rein in excess liquidity.

"(We will) use the interest rate in a flexible way and ... gradually bring out the important role of prices in monetary regulation," according to its monetary policy for the fourth quarter of 2006 posted on its website on Friday.

The People's Bank of China said in the report the inflationary pressure was "on the rise", compared with its outlook for the third quarter that inflationary pressure "remained".

It warned that pressure from rising prices was increasing.

Analysts said the central bank may raise the interest rate as the consumer price index (CPI) continues to rise.

The annual CPI growth for 2006 was 1.5 percent on the previous year, but it was 2.8 percent for December, raising concern that the central bank may take measures in the coming months.

Stephen Green, senior economist with Standard Chartered Bank, told the Chinese-language press on Wednesday that there is an 80 percent possibility the bank will raise the rate by 27 basis points in the first half of the year.

Shanghai-based Shenyin and Wanguo Securities said in a recent report that the central bank may raise the rate soon after economic and financial statistics are released in mid-February.

Zhao Xijun, an economist from the Renmin University of China, said the next two months would be crucial. "The decision to raise the interest rate will depend on the situation in the next two months," he told China Daily. "If the CPI exceeds the 3 percent mark in January and February, the central bank may take some measures."

Regarding liquidity, the central bank said in the report that it would "improve its management". "We will use different ways, including open market operation and raising reserve requirements, to effectively control liquidity in the banking system," it said.

Since April, China has raised the reserve requirement ratio, or the ratio of money banks must hold in reserve, four times, and has twice raised the interest rate.

Meanwhile, China may allow another 20 foreign banks to incorporate locally this year.

Banking industry sources said the China Banking Regulatory Commission could approve the local incorporation of another 10 foreign banks as early as next month.

Another 10 banks may get the go-ahead in the second half of the year, taking the total number of approved foreign banks to about 30.