Immediate interest rate rise unlikely
By Chuan Yu (China Daily)
Updated: 2004-09-29 09:07

China's central bank said yesterday the country's rapidly growing economy is heading towards the macro management targets the authorities outlined for this year.

The central bank's optimistic view will help dampen speculation in the marketplace about an immediate interest rate increase, widely seen as the next appropriate major step the authorities can take to slow down economic growth, analysts said.

"Generally speaking, the monetary policy actions taken so far have had their effect, and the current monetary and credit performance is in line with targets of steady monetary and credit growth," the People's Bank of China's (PBOC) Monetary Policy Committee said yesterday in a statement on its third-quarter meeting.

During the next three months, the bank will flexibly deploy multiple monetary instruments, further promote the fundamental role of interest rates in resource allocation, and continue to fine-tune money supply and credits properly, it said.

Speculation about an interest rate rise has been running high in recent months, especially as Chinese residents are growing impatient about negative real interest rates.

China's interest rates are at a year's low, with the one-year deposit rate standing at only 1.98 per cent, while prices have kept accelerating to turn real interest rates negative. Consumer price index growth was over 5 per cent in August.

Yet key economic data are sending only mixed signals. While the consumer price index remains relatively high, growth in money supply and new loans has been slowing more significantly than expected.

Wang Yuanhong, a senior analyst with the State Information Centre, said the possibility of an interest rate hike in the near term was remote, taking note of a rapid slowdown in monetary and loan growth that threatens to disrupt economic growth.

Although there remains the possibility of a rebound in fixed investment that calls for an interest rate rise, "with the central bank watching the situation now, the possibility is slight," he said.

The central bank said earlier this month that its task of leading the economy to a soft-landing remains at a critical juncture, warning that any let-up in policy restraint may risk conceding ground already gained in the campaign.

China has taken a raft of measures, including raising bank reserve requirements and administrative measures such as imposing strict land controls and credit curbs, to contain the fast growth in fixed investment and money supply that started in the latter half of last year.

The frenzied investment and loan growth raised worries about the economy becoming overheated.

Fixed investment growth registered only 18.3 per cent in May, which compared to more than 50 per cent in the first two months of the year, while money supply growth slid to 15.3 per cent in May from over 20 per cent earlier this year.

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