BEI HU

Last week's surprise interest rate rise is a sign of the mainland's move towards market-based policy measures to cool the economy, according to a senior central bank official.

Hinting at the need for further measures to rein in the economy, People's Bank of China vice-governor Wu Xiaoling parried questions yesterday on whether there would be further domestic interest rate increases in the near term and the implication for the mainland's rigid exchange rate regime.

The central bank raised its benchmark one-year lending and deposit rates by 27 basis points on Thursday.

"The key to this round of interest rate increases does not lie in the magnitude of rate changes," Ms Wu said on the sidelines of a conference in Hong Kong. "Instead, it indicates that the Chinese government is hoping to resort to more market measures to achieve macroeconomic control."

Economists are widely predicting more mainland interest rate increases will follow.

Deutsche Bank greater China chief economist Ma Jun expects two or three more modest rises in mainland one-year benchmark rates - totalling 50 to 75 basis points - in the next 12 months.

Noting that last week's rate rise was the smallest in mainland history, Goldman Sachs economist Liang Hong predicted a bolder 100 to 150 basis point cumulative interest rate increase over the next 12 months.

The actual changes would depend on "the strength of global growth and the extent to which the currency revaluation is allowed to play a role in monetary tightening", she said in a report on Monday.

In response to such expectations, Ms Wu said yesterday: "When the central bank raises its interest rate, the decision is not solely based on the level of [real] interest rates. It is rather an expression of the central bank's assessment of the macroeconomic situation.

"And it is a signal to the market to help achieve the central government's target for macroeconomic adjustments."

Because the effective pegging of the yuan to the US dollar limits the mainland's freedom to adjust domestic interest rates to fine-tune its economy without a dramatic impact on cross-border capital flows, some analysts see liberalisation of the foreign exchange regime on the horizon.

Without a currency revaluation, the magnitude of money supply and interest rate tightening required to reach the government's economic target would be much larger, Ms Liang said.

"The fact that the government allowed interest rates to go up after months of resistance raises hope that it will soon do the right thing on its currency policy as well," she wrote.

"As a central banker, I cannot give you an outright answer as to whether or not we are changing [the exchange rate regime]," Ms Wu said yesterday.