Economists expect the government to roll out several measures, including fiscal stimulation to rural areas and tight monetary policies, to battle inflation which rose to its highest rate in nearly 12 years in February.
The consumer price index, the main gauge of inflation, rose 8.7 percent year on year in February, the biggest jump since the 8.9 percent recorded in May 1996. The jump was beyond market expectations.
Food costs climbed 23.3 percent in February as the worst snowstorms in half a century in the country disrupted supplies, especially of vegetable and aqua products.
Given the worsening inflation in February, restraining consumer prices should be Beijing's top priority, said Tang Sumei, an economist at Moody's Economy.com.
The People's Bank of China, the central bank, raised its benchmark one-year lending rate six times to 7.47 percent last year and hiked the reserve requirement 11 times to a record high of 15 percent in a bid to contain inflation.
"Further interest rates increases are likely as the (central bank) governor recently signalled that there is still room to raise rates to fight inflation,'' she said in a research note. "However, given the slowdown in the US economy and in world trade, a tightening monetary policy will likely dampen business activities and consumer demand on the mainland, and thus weigh on the nation's economic expansion.''
Therefore, along with increases in rates, authorities may also strengthen fiscal policy to stimulate consumption, including increasing public expenditure in rural areas to boost agriculture production, and so easing supply shortages which are fanning price pressures, Tang said.
Her view is echoed by China International Capital Corp and Guosen Securities Co.
"The room for interest rate increases is limited and more measures to boost supply like boosting the agricultural sector, quicken industry structure adjustment and cut energy consumption are channels to solve the undersupply, which is pushing up inflation,'' said Guosen Securities in a research note yesterday.
CICC sees a combination of measures including a faster appreciation of the yuan, interest rates increase at the right rime and a host of subsidies to the agricultural sector.
(Shanghai Daily March 13, 2008)
