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China may cut interest rates by 81 basis points in 2009 - UBS

(Xinhua)
Updated: 2009-01-30 09:41

BEIJING  -- China may lower the benchmark interest rates by 54-81 basis points in 2009 in an effort to ease deflationary pressure and spur growth, UBS said in a recent note.

A bike rider passes the People's Bank of China, China's central bank, in Beijing in this file photo. [Asianewsphoto]

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Deflation is by far the bigger threat in China this year although many have voiced concerns of a rapid return to inflation due to the massive liquidity injection, a surge in bank lending and the fiscal stimulus, the bank said.

It forecasted that China's consumer prices will fall in the first few months of 2009, partly due to the high base effect.

The retreat in inflation has prompted some economists to call for more government measures to avert a coming deflation, as it could raise real interest rates and discourage business investment to make the economic situation worse.

To support the weakening economy, China has cut the lending rates five times, or by 216 basis points, since mid-September. A basis point is 0.01 percentage points.

China's consumer price index (CPI), the main gauge of inflation, rose 1.2 percent year-on-year in December, the eighth consecutive month of deceleration and the slowest rise since July 2006.

The CPI was 2.4 percent in November, and it hit a 12-year-high of 8.7 percent in February.

UBS said the year of 2009 provides a good opportunity to reform the pricing mechanism of energy and resources to help usher in a more balanced economic growth.

"We think there is a good chance that the government would raise the prices of certain utilities and resources, and procurement prices of agricultural products," the bank noted.

The measures will help the CPI growth to stay positive for the whole year, it said, adding it expected a 0.2 percent consumer inflation for 2009.