China likely to announce interest rate hikes in Q3

China is likely to raise its benchmark interest rate one or two times during the third quarter of this year to contain inflationary pressures, the Beijing Times reported on Saturday. Reserve requirement ratios for large financial institutions currently stand at a record high of 21.5 percent, which leaves little room for China to announce further reserve ratio hikes, the newspaper quoted a report issued by the Bank of China (BOC) as saying. The country often uses ratio hikes as its first line of defense against inflation, assuming that the move will make it harder for banks to lend and thus cool the country's overheating economy, the report said. The nation has already required banks to hold more of their deposits in reserve six times this year in order to remove excess liquidity, despite the fact that there is little evidence to show that the measures have helped to tame prices, the report said. Cao Yuanzheng, the BOC's chief economist, said interest rate hikes are the country's preferred method of tackling inflation, which has remained stubbornly high since mid-2010. China's consumer price index (CPI), a main gauge of inflation, rose to a 34-month high of 5.5 percent in May, well above the government's target ceiling of 4 percent. The CPI is expected to reach 6 percent in June. The BOC report said the CPI will rise 5 percent year-on-year for the third quarter, down 0.5 percentage points from the second quarter. Consumer prices have been driven up by several factors, including rising labor costs and a recent credit binge, Cao said, adding that the persistence of these factors means that inflationary pressures will not be "fundamentally eased" anytime soon.