Inflation accelerating

What adds to the headache of the central bank is the accelerating inflation, fueling speculations that an interest rate rise was imminent.

The Consumer Price Index, a key indicator of inflation, rose 2.7 per cent year-on-year in February, said the National Bureau of Statistics Tuesday, after gaining 2.2 per cent in the previous month.

In response to the released figure, central bank governor Zhou Xiaochuan said increases in consumer price index have been high in recent months, but the government needs more time to study the implications of the data, particularly for February.

The February price hike was mainly driven by rising food costs. Food items gained six percent in the month while non-food items rose just one percent, according to the statistics.

But holiday generally distorts economic figures. China's biggest festival, the Lunar New Year fell in the middle of February this year and in mid-January last year.

The combined price increase for the first two month of the year is 2.4 percent. The central bank has set an annual target of 3 percent for inflation control.

The increasing inflation pressure rekindled speculations that the central bank might resort to interest rate rise.

However, an interest rate rise is expected to attract more "hot money" into China, said Zhang Jun, head of the Chinese Economy Research Center of the Shanghai-based Fudan University, adding to the excess liquidity plaguing the central bank.

"The central bank should be extremely cautious when deciding whether to raise the interest rate," said Zhang.

He suggested a shift to investment data from consumption statistics when examining monetary policy. "The Chinese economy is different from the foreign economies. Consumption is not a major part and investment plays a bigger role."

An interest rate rise is necessary only when there is a big jump in fixed assets investment, noted Zhang. The National Bureau of Statistic is expected to release the fixed assets investment figure on Friday.

Ha Jiming, chief economist at China International Capital Corp. also proposed to wait for the investment data. "We will get a better picture about the interest rate by then."

Reining in excess liquidity is a priority of Beijing's monetary policy, said Wu Xiaoling in an article published by the People's Daily in February. However, interest rate could hardly contribute to this end, said Wu.

The central bank has raised its benchmark interest rate twice since April. The current one-year benchmark lending rate stood at 6.12 percent.

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