Facing inflation caused both by increasing costs and rising demand, China is likely to raise its interest rates for once or twice in the first half, says a Bank of China forecast.

The BOC report forecast the consumer price index (CPI) in February would hit 8.3 percent.

It ranked inflation as the top threat to China's economy, which it said already had the preconditions of a demand-driven inflation, though the overall price hikes caused by rising demand were yet to occur.

If prices remained high for a long period, people would expect further rises and hoard commodity products, further pushing up prices, it said.

Xie Fuzhan, head of the National Bureau of Statistics (NBS), acknowledged that the CPI would climb even higher in February because of the severe winter weather that damaged crops, cut power supplies and disrupted traffic in eastern and southern China.

The inflation indicator reached 7.1 in January, its fastest pace in more than 11 years, according to official figures.

Xie, who is also a member of the central bank monetary policy committee, said they were yet to discuss whether to raise interest rates in the near future, but the tight monetary policy would not change.

The report noted the unconventional increase of foreign direct investment in January, saying it signaled more capital inflow into China on anticipation of faster yuan appreciation. It advised the central bank to expand exchange elasticity.

It also predicted that China's yuan would appreciate faster against the U.S. dollar in the first half, but would gradually slow down.

(Xinhua News Agency March 10, 2008)