China May Raise Rates 6 Times Through 2011, Mizuho’s Suzuki Says

China may raise interest rates up to six times by the end of next year as inflation becomes more entrenched in the economy, according to Mizuho Research Institute Ltd.

China’s central bank has relied on reserve-requirement ratios to help control liquidity, and with levels near 20 percent there’s little room for increases, said Takamoto Suzuki, a senior economist at the unit of Japan’s third-largest bank.

“A rate hike will be inevitable,” Tokyo-based Suzuki said. “It wouldn’t be surprising if the central bank lifts interest rates by about 1.5 percentage points by the end of next year.”

Consumer prices climbed 5.1 percent in November from a year earlier, the fastest since July 2008, the statistics bureau said on Dec. 11. The People’s Bank of China this month announced its sixth increase in reserve-requirement ratios, making major banks to set aside 18.5 percent of deposits. The PBOC raised borrowing costs in October for the first time since December 2007, increasing the one-year deposit rate to 2.5 percent and the lending rate to 5.56 percent.

The central bank is aiming to unwind a super-easy monetary policy enacted in the wake of the financial crisis, so tightening won’t likely dampen growth, said Suzuki, who had been based in Shanghai from June 2008 until earlier this month.

The central bank may also use open-market operations focused on three-year bills for the first time since 2007 to absorb liquidity, he said.

Growth Model

China’s leaders pledged at an annual meeting this month to accelerate a shift in the nation’s growth model in 2011 and also to focus on stabilizing prices. Policy makers set an inflation target of 4 percent next year, China Central Television reported this week, citing the National Development and Reform Commission.

The nation’s cabinet confirmed in November that the government may impose temporary price controls on “important daily necessities” and production materials. Inflation is becoming more pervasive as China’s economy develops, spreading to fuel and public services, Suzuki said.

“When the economy grows around 10 percent, 4 or 5 percent inflation will be unavoidable,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE