China’s July rate hike will be last for 2011, say analysts

Analysts have said the People's Bank of China's (PBoC) decision to raise interest rates on Wednesday could mark the end of further rate hikes this year, amid growing uncertainty over the health of the economy.

The central bank raised its 12-month benchmark lending and deposit rate by 25 basis points, taking them to 6.56% and 3.50% respectively.

Data from China's National Bureau of Statistics shows annual inflation in May was 5.5%, and up 0.1% from the month before. The move was largely driven by high food prices, which were up 11.7%.

With annual inflation in June expected to rise above 6%, the latest interest hike was largely a pre-emptive move on further inflation, Hui Feng, a research fellow at the University of Queensland, told CentralBanking.com. "The PBoC should have known the CPI figure for June and that figure would be very uncomfortable," Feng said.

Feng said the medium term outlook for the central bank was more uncertain with the manufacturing sector expected to lose steam over the coming months and inflation set to remain elevated for some time. "Although inflation is believed to peak in the next couple of months, CPI will still stay at a relatively higher level given [the] high level of domestic liquidity," Feng said.

After its second quarter of 2011 monetary policy committee meeting, the PBoC said inflationary pressure remained at a "high level" and stressed policymakers "pay close attention" to the implementation of "prudent monetary policy". Feng said that although the Chinese officials appeared to put more weight on the concern of inflation, any further rate actions would put pressure on economic growth. "This means the [central] bank will stay put for a while," he said.

Mark Williams, a senior China economist at Capital Economics, said he also expected no more interest rate moves in 2011. Williams said that as inflation begins to fade in the second half of the year, policymakers were likely to shift their focus on the weakness of growth rather than the overheating of the economy, with a loosening in credit policy a distinct possibility.

Although China recorded GDP growth of 9.7% on annual terms, Williams said on quarter-on-quarter basis growth was much slower, and expected to be closer to 7.5%.

"Price pressures are still lingering and a recent surge in pork prices is likely to keep headline inflation high until the end of the third quarter. Nonetheless, as evidence mounts that growth has slowed, policymakers are likely to relax their squeeze on bank lending," he said.