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China Agbank Forecasts More Rate Hikes, Reserve Increases

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The Agricultural Bank of China (Agbank) released a research note on Friday that foresees an additional increase in the country's benchmark interest rate and reserve ratios, as well as higher consumer inflation and faster appreciation of the yuan against the dollar.

Reuters reported that the strategic planning unit of the state bank predicted that inflation may hit 6.0% in June. In March the rate was 5.4%, a 32-month high. "As CPI in the second quarter will be higher than in the first quarter, it is still necessary for China to increase interest rates," the research note said.

Benchmark interest rates have been increased four times since October, and the People's Bank of China has increased the required reserve ratio (RRR) four times in 2011; it now stands at an all-time high of 20.5%. The research note said that the RRR may be increased again in the next two months; this fits with last week's comment by Zhou Xiaochuan, governor of the central bank, who said there was no upper limit on the RRR and that money tightening policies would continue for a while.

Agbank, however, commented that an RRR of more than 23% would have "seriously negative impacts" on the operation of commercial banks. It did not explain further.

The note also said that the dollar/yuan ratio by the end of June may hit 6.46; this would result from an appreciation of 2.5% in the first half of the year. Economists said in the note, "As price rises accelerate and imported inflation pressure remains large, a faster yuan appreciation will help China to ease inflationary pressure."

Some overseas investment banks apparently agree. Yao Wei, an economist at Societe Generale, was quoted in the report saying at a Beijing media briefing, "I think the battle against excessive liquidity is far from over. The central bank would stick to its tightening stance in coming quarters." She raised the image of two more interest rate hikes in 2011, as well as three additional RRR increases at some point.


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