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Consumer Prices Set New Highs, Chinese Policy Makers in a Dilemma
Aug 11,2011 17:29CST
smm insight
Consumer Prices Set New Highs, Chinese Policy Makers in a Dilemma

SHANGHAI, Aug. 11 (SMM) -- According to the National Bureau of Statistics (NBS), China’s CPI for July set a 37-month high, overturning market views that June’s CPI has reached the highest. In consideration of turbulent international economic situation, there are slim chances that China’s Central Bank will raise the Reserve Requirement Ratio (RRR) or increase interest rates.  

China’s National Bureau of Statistic announced on August 9th that July Consumer Price Index grew 6.5% YoY, hitting a 37-month high, and grew 0.5% from June’s 6.4%. With high uncertainties over European and US economic outlooks, China’s central bank has become more cautious when making decisions, therefore further tightening measures including a rate-hike are expected to postpone. Meanwhile, data show industrial producer EXW prices rose 7.5% in July, which was little changed compared with June. Industrial producer purchase prices rose 0.1% MoM and rose 11% YoY.

The downgrade of US credit rating means higher interest rate, tight fiscal policy and waning demand in the US, which will negatively affect China’s exports of the US. China’s CPI for July hit a three-year high, and overseas economic uncertainties increased, which will add difficulties for Chinese macro regulation. It is expected that possibility for China to adopt further tightening measures will be low. If China hikes interest rate, a large amount of hot money will flux into China, which will dampen effects of China’s inflation regulation and will also fuel expectation of RMB appreciation.

The US Federal Reserve (Fed) made an unprecedented pledge on August 9th to keep interest rates near zero for at least two years. According to recent Fed’s statements, the Fed becomes more pessimistic toward US economic outlook, and it is more necessary for the Fed to take further measures to stimulate the economy, increasing the possibility of the third round of quantitative easing (QE3). China may need to decide follow-up measures after waiting and seeing a clearer direction from European and US debt issues given growing uncertainties surrounding overseas economic conditions, so China’s monetary policy is more likely to remain unchanged in the near term.

base metal price; policy makers

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