Chinese interest rates expected to rise in face of ever-increasing inflation

Premier Wen Jiabao said tackling inflation was the government’s top policy priority while central bank governor Zhou Xiaochuan said the authority needed to make maintaining price stability “more prominent and important.”

Inflation rose to a three-year high of 6.4 per cent in June, data showed on Saturday. Yesterday’s comments marked a fresh attempt to show the inflation fight is far from over and the government is determined to bring prices back under control, analysts said.

“If they signal any comfort with inflation, and inflation is as high as it is now, they could create an environment in which people would panic, and they can have a real problem on their hands,” said Tim Condon, head of Asia research at ING in Singapore.

Mr Wen declared curbing price pressures as the top priority in China’s version of a State of the Union address in March, when inflation was one percentage point lower than June’s level.

The Communist Party is worried that rising prices could spill over into public protest. Mr Wen said in March that inflation could threaten social stability in the world’s second-biggest economy.

“We must treat stabilising overall price levels as the top priority of our macro-economic controls and keep the direction of macro-economic adjustments unchanged,” Mr Wen said in remarks reported yesterday by the central government’s Internet portal www.gov.cn. He said the government would try to stabilise prices of pork, a staple meat for the Chinese and the most closely watched item in controlling inflation, by boosting the supply of hogs. Pork prices in June were 65 per cent high than a year earlier, official figures showed.

China would maintain a “prudent policy” to bring prices back under control while trying to avoid causing big swings in economic growth, Mr Zhou said.

“The most prominent problem in macro-economic operations is the relatively big inflationary pressure and still strong inflationary expectations,” he added.