China govt think-tank urges higher interest rates

BEIJING: China should raise interest rates further to tame inflation and correct the negative real interest rates that undermine government efforts to spur consumption, a top government think tank said in a report published on Wednesday.

The State Information Centre said in a lengthy report in the official China Securities Journal that rising food prices were hurting consumer confidence and squeezing their spending power, undermining the government's efforts to boost consumption.

"China's real deposit rate has been negative for 16 months and prices are still climbing. We suggest the central bank increase interest rates further by one or two percentage points, to change the negative returns on household savings," the centre said.

The report came after China's Premier Wen reaffirmed that fighting inflation will remain the country's top economic priority but also explicitly expressed concerns about slowing growth following a series of tightening steps.

Chinese inflation hit a three-year-high of 6.4 percent in the year to June. Economists had expected it to peak in July before moderating afterwards.

The central bank has raised benchmark interest rates five times since October and lifted banks' reserve requirement ratio -- its preferred policy tool to mop up excessive cash in the economy -- nine times.

The National Bureau of Statistics will announce second-quarter GDP growth on Wednesday, as well as data on industrial output, fixed-asset investment and retail sales, which will show how much growth in the world's second-largest economy has moderated.

Copyright Reuters, 2011