Raising interest rates too quickly could result in a 'hard-landing'

BEIJING - Inflation may rise further after it hit 5.3 percent year-on-year in April, economists said, but policymakers should not increase interest rates, at least in the short term, if they want to avoid a "hard-landing".

The Consumer Price Index (CPI), a key gauge of inflation, was 0.1 percentage points lower than the 32-month high of 5.4 percent in March, but it is still significantly higher than the government's 4 percent target for this year, the National Bureau of Statistics (NBS) said on Wednesday.

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"The decline indicates that the government's previous measures to tame inflation have taken effect," Sheng Laiyun, spokesman for the NBS, said at a news conference.

However, soaring raw material prices and excessive liquidity in global markets may continue to increase inflationary pressure in the short term, Sheng said.

Despite recent drastic fluctuations, oil prices remained above $100 a barrel, adding to inflation fears in emerging market economies, which are heavy oil consumers.

Meanwhile, China's housing prices, including rent, water and gas, jumped 6.1 percent from a year earlier in April, the largest contributor to the non-food price growth of 2.7 percent year-on-year, according to the NBS.

"Non-food inflation has become an increasing concern and it may further lift the CPI up to a new high in June or July this year," Jing Ulrich, JP Morgan's chairman of global markets for China, wrote in a note on Wednesday.

The stubbornly high CPI may force the central bank to continue its tight monetary policy, including controlling money supply and raising interest rates, a move expected by many investors, said Chang Jian, a Hong Kong-based economist with Barclays Capital.

But analysts said that raising interest rates will hurt the corporate sector.

Lu Zhengwei, chief economist at Industrial Bank, said that tight monetary policy will make it more difficult for companies, especially small- and mid-sized ones, to raise money. These companies could reduce investment and cut production because of rising borrowing costs, he said.

According to NBS statistics released on Tuesday, industrial output increased by 13.4 percent year-on-year in April, 1.4 percentage points lower than in March.

"The decline shows that the previous tightening has taken effect and policies should get more flexible in the coming months to avoid a hard-landing," said Dong Xian'an, chief economist at Peking First Advisory, a Beijing-based research institution. "I would not say that there won't be interest rate hikes, but they may come in the third or fourth quarter," he said.

Inflationary pressure has eased, he said, despite the high CPI figure. The annualized month-on-month CPI growth, which better reflects the current inflationary situation, was about 10 percent in November, but has dropped to below 4 percent in April, he said.

"I don't think there will be more interest rates hikes this month, but the reserve requirement ratio for banks (the proportion of money lenders must keep as reserves) may be raised," said Lu from Industrial Bank.

Chang of Barclays Capital also said he believed the government needs to avoid excessive tightening, which could lead to a hard-landing.

The People's Bank of China, the central bank, has raised the reserve requirements for banks four times and benchmark interest rates twice since the beginning of this year to soak up excessive liquidity and control inflation.

Food prices in April, which account for about 30 percent of the CPI basket, went up year-on-year by 11.5 percent, roughly the same as in March.

Vegetable prices slumped by 11.2 percent month-on-month, due to sufficient supply, according to the statistics bureau.

Prices could further decline in the second half of this year as "imported inflation" weakens, analysts said.

Xin Zhiming contributed to this story.