China needs to hike interest rates to cap inflation - DBS

06 October 2010 09:37  [Source: ICIS news]

SINGAPORE (ICIS)--China may need to hike interest rates soon to prevent consumer prices from rising further amid a weakening of the US dollar and a pick-up in industrial production, DBS Bank said on Wednesday.

“China should raise interest rate much earlier this year alongside with rate hikes action taken in other Asian countries,” the Singapore-based bank said in a research note.

While inflation in China, as measured by the consumer price index (CPI), appeared reasonably well-controlled at an average of 2.8% in the first eight months of the year, “the risk of it going up further is clearly high”, DBS Bank said.

The weakening of the US dollar was partially inflating the cost of food in China via the import channel, it said.

"With the food component accounting for 33% of the overall index, the upward bias on inflation risk is likely to remain strong," DBS Bank said.

A more direct monetary policy measure would also help prevent the formation of an asset bubble in the property market, where robust sales continued to jack up prices despite the government’s austerity measures in the first half of the year, it said.

“The costs of inaction are going up steadily over time. At this juncture, better reading from the supply side indicators such as PMI [Purchasing Managers’ Index] and industrial production figure may not mean too much if robust readings cannot translate into effective policy action,” DBS Bank said.

China recorded a 53.8% PMI reading for September, marking the 18th consecutive month of expansion in industrial production, according to the China Federation of Logistics & Purchasing.

The figure was up 2.1 percentage points from August, based on the data.

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By: Pearl Bantillo
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