BEIJING, Feb. 5 -- China's central bank Sunday ruled out an immediate interest rate rise amid speculations that the surging Consumer Price Index (CPI) may force the regulators to act, a news report said Monday.

    The People's Bank of China needed further observations to decide whether to raise the interest rate as the current CPI rise fueled by a jump in grain prices was not sustainable, said Assistant Governor Yi Gang at a forum hosted by Peking University, according to the Beijing Morning Post.

    The Consumer Price Index surged 2.8 per cent year on year in December, the biggest increase in two years and much higher than market expectations.

    Speculations are mounting that the central bank may raise interest rates to curb the inflation, contributing to recent stock market falls on Fridays as the central bank usually announces interest rate changes on Friday evening.

    The CPI hike came after a significant reduction in world grain output led to an increase in international grain prices, pushing the related Chinese prices higher.

    Concerns of equity market bubbles also raised the possibility for an interest rate rise. China's benchmark Shanghai Composite Index surged more than 130 per cent in 2006 in a bull run.

    "I think the current CPI rise caused by grain price hike is only temporary," Yi Gang told the forum, casting doubts about the continued grain price rise. "China has had a bumper grain harvest for three years in a row and the possibility for a continued major price rise is small."

    Besides CPI, the central bank also takes close looks at the Producer Price Index and imports prices when measuring inflation, Yi added. "The central bank sticks to prudent monetary policy. Further observations are needed to decide whether to raise interest rate."

    Domestic prices will continue the upward trend and the CPI is expected to grow 2.6 per cent in the first quarter, according to projections by 14 institutions released Sunday at the forum. Eleven of these institutions foresaw an interest rate rise before April.

    But Citygroup economist Shen Minggao disagreed on the timing of the rise, as he deemed the inflation expectations to be not high. He introduced two other factors besides the CPI that the central bank will consider when making the decision: government concerns on the assets price bubble, for example in the housing and equity markets; and credit expansion pressure.

    Economists were divided on whether the central bank should increase the interest rate.

    An interest rate rise was unnecessary, said Gao Shanwen, chief economist of Everbright Securities as the CPI rise caused by the increase in grain prices is not sustainable and the accelerating appreciation of Chinese yuan will curb inflation.

    Instead, he suggested the government increase the flexibility of yuan exchange rates, accelerating the appreciation of the yuan and raising the reserve ratio for commercial banks.

    However, Ha Jiming, chief economist of the China International Capital Corporation Limited, believed the time has come for an interest rate rise.

    China's deposit rate is just two per cent after tax and real rate is negative, said Ha. The low rate increases risks for banks, produces bubbles in assets prices, enlarges the wealth gap and harms structure adjustment, capital market development, even the entire national economy.

    But an interest rate may not cool down the bullish equity market, according to Peng Xingyun, an economist with the Chinese Academy of Social Science. An interest rate rise is sure to attract more idle funds into China, adding to the excessive liquidity that is widely recognized as the most important reason for the stock market rally, said Peng.

    The current liquidity level does not warrant an immediate interest, either, according to Yi Gang. "The liquidity is relatively high in general for the time being, for not as high as thought," Yi Gang was cited by the Securities Daily as saying.

    (Source: China Daily)