CPI of 3% May See Rate Hike

BEIJING, May 19 -- China's top planning body Tuesday projected May and June inflation at about 3 percent, which may trigger a possible hike in interest rate.

The consumer price index, the main gauge of inflation, may rise about 3 percent in the two months, the National Development and Reform Commission said on its Website Monday.

China's inflation rose 2.8 percent in April, the biggest increase in 18 months.

There are reasons to expect prices to rise as the figure a year ago was negative, the NDRC said. In May 2008, inflation fell 1.4 percent.

The NDRC expects inflation of 2.5 percent in the first half of the year and expects the CPI to be "mild" this quarter.

China is targeting to control its inflation within 3 percent. That's why an inflation of more than 3 percent is widely viewed as a possible trigger for interest rate to rise.

Barclays Capital said in a report earlier that the interest rate may climb in the latter half of this quarter if inflation rose to 3 percent.

The view is also echoed by Lu Zhengwei, an Industrial Bank senior economist, who sees an interest rate hike as early as this quarter. China has kept its interest rate since 2009.

China's official monetary stance is still "appropriately loose" but tightening moves have already been launched to cool the red-hot property market and to avoid over-heating.

One factor that may hold off an interest rate increase is the Greece debt crisis, economists said. China may have to weigh the threat of domestic overheating, including soaring property prices, and concerns of another global economic dip due to the Greece crisis, they said.

"We see some risks that will delay an interest rate hike to the third quarter, depending on the evolution of the debt crisis in Greece," the report said.

Europe is China's largest export destination, accounting for 20 percent of total exports.

"Any slowdown in export growth due to the situation in Europe may cut the size of policy tightening that would otherwise be needed to curb overheating pressure in the Chinese economy," Barclays said.