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April 19, 2011

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More hikes may come in May

ANOTHER hike in reserve requirement ratio and one more interest rate increase are expected as early as in May as the Chinese central bank continues to withdraw liquidity from the system in its battle against inflation, economists said.

"We look for at least another reserve requirement hike during the second quarter and also expect interest rates to be raised moderately to anchor inflation expectations and correct negative real rates," Barclays Capital said in a report yesterday.

ANZ said in a report yesterday that another interest rate hike may come next month because of the worsening negative real interest rate.

China's benchmark one-year deposit rate is now at 3.25 percent, while March inflation rose to a 32-month high of 5.4 percent.

Qu Hongbin, HSBC's chief economist in China, expects one more interest rate and one more reserve requirement ratio increase in May or June in case the latest reserve requirement hike shows no signs of monetary easing.

China on Sunday ordered commercial banks to set aside more money from lending from Thursday, the fourth order this year.

The ratio for banks will rise by 0.5 percentage point. Big banks will face a 20.5 percent requirement after the move.

People's Bank of China Governor Zhou Xiaochuan said at the Boao Forum last Friday that there is not a clear (upper) limit on the required reserve ratio, while more aggressive interest rate hikes will lead to hot money inflows.

Barclays expects open market operations to play an increasingly important role as the PBOC withdraws liquidity, particularly in the second half of the year.

Meanwhile, JPMorgan said it expects two more interest rate increases this year.

Wang Tao, a UBS AG economist, said China won't ease its tightening policies because inflation may stay above 5 percent in the second quarter. She expects a combined 50-basis-point interest rate rise this year with "several" hikes in the reserve requirement.




 

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