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Interest rate hike likely

(Xinhua)
Updated: 2007-03-15 15:21

An interest rate hike is on the cards in China to curb excessive liquidity as bank lending rebounded in February.

"The rapid growth in bank loans and M1 supply raise the possibility of raising interest rates by the People's Bank of China (PBOC) around April," according to an analytical report in the China Securities News.

renminbi-denominated loans climbed to 413.8 billion yuan (US$53.5 billion) in February, an increase of 264.7 billion yuan over the same period last year, figures released by PBOC showed, signaling a resurgence of excess credit lending despite government restraining policies.

The report said the constant growth in M1 supply, the narrow measure of the money supply which includes cash in circulation and corporate demand deposits, rose 21 percent to 12.6 trillion yuan by the end of February, and has added inflationary pressure and made another interest rate hike necessary.

Measures have been launched by the central bank to contain liquidity after 560 billion yuan was withdrawn through open market operations in the two weeks ending last Friday.

The containment policies, however, were offset by the newly-increased currency liquidity generated by mounting trade surplus in February, which surged 51.7 percent to a record US$23.75 billion.

In the fight against excess liquidity, the government has been cautious about further interest rate hikes, fearing that they will entice more speculative funds into the country and accelerate the formation of economic bubbles.

To date, the central bank has preferred to raise the deposit reserve ratio - rather than interest rates -- to soak up excess liquidity.

The central bank has lifted the deposit reserve ratio five times since last July, with the latest move on February 25 expected to take 176.5 billion yuan out of the banking pool.

However, an interest rate hike was inevitable, as reserve ratio adjustments and open market operations had proved ineffective, according to the report.

The last interest rate hike was in August last year, when the central bank raised the one-year benchmark interest rate by 0.27 percentage points.