Jan. 23 (Bloomberg) -- China will probably let its currency appreciate by at least 5 percent in a one-time move and raise interest rates to cool the economy and curb inflationary pressures, Goldman Sachs Group Inc. Chief Economist Jim O'Neill said.
The Chinese government may allow the yuan to have "a bigger one-off move than people talk about, at least 5 percent, maybe more," O'Neill said in an interview today at the London School of Economics. "They may also consider having a wide band to let it move more frequently on the daily basis to stop speculative players."
China's economy rebounded stronger than anticipated in the fourth quarter, and the inflation rate accelerated to a 13-month high of 1.9 percent in December, igniting speculation the government will abandon the yuan peg to avoid the economy from overheating. China has kept a lid on its currency since July 2008 after it strengthened 21 percent against the dollar over the previous three years.
"Part of the idea of doing these things is to surprise people so we are not going to get any hints of it happening," said O'Neill. "We'll just wake up on an unpredictable day and see it happen."
Besides loosening controls on the exchange rate, Beijing will also raise interest rates soon, according to O'Neill.
"It will definitely happen, and it could happen any day," he said.
China's yuan traded at 6.8269 per dollar in the spot market as of 3 p.m. in London.