Chinese inflation may rise despite tighter monetary policy and a further increase in interest rates cannot be ruled out, central bank governor Zhou Xiaochuan said on Saturday. "We've adjusted interest rates but (inflation) may go up a little bit," Zhou told Reuters on the sidelines of the Bank for International Settlements annual meeting in Basel.
Asked about further interest rate increases, he said: "I don't exclude the possibility." The People's Bank of China had expected higher inflation in May, when consumer inflation hit a 27-month-high of 3.4 percent, and Zhou said that interest rates had been adjusted accordingly.
Zhou told reporters later that he was concerned about inflation but it was under control. Surging food prices, especially pork, have stoked concerns about inflation. After the May consumer price data was released last week, Premier Wen Jiabao said the government was prepared to tighten policy further to restrain the economy and inflation.
The central bank has raised interest rates four times in the past 14 months, most recently in May. Some government economists and outside analysts have said two or three further rate increases this year could be needed, with the inflation-adjusted deposit rate currently in negative territory.
The benchmark borrowing rate, on one-year deposits, is 3.06 percent, while China's consumer price index is expected to rise about 3.3 percent in 2007, according to a research body under the China National Development and Reform Commission, China's top planning agency.
Zhou also said China is managing its $1 trillion-plus FX reserves - the world's biggest - actively but in a controlled manner. China's reserves have ballooned in recent years as the central bank, in order to hold down the yuan, has bought most of the dollars generated by a growing trade surplus, inflows of foreign direct investment and speculative capital.
"We are adjusting our FX reserve management policy according to the principles we always say in a gradual, controlled and active manner," he told reporters, speaking in Chinese.
Zhou also said China's gradual move to make the yuan currency fully convertible is here to stay and Beijing will formulate foreign exchange policy according to its own views. "The reform direction is to gradually allow the renminbi to be fully convertible," he said. Zhou said he was watching development of the Chinese stock market closely.
"We are closely watching the stock market in China. We are not sure whether there is a clear bubble. We worry that if the price-earnings ratio is too high, then the investor should take care about their investment," he said. Zhou added that growth in the second quarter might be slower.