China to hike interest rates this year: Expert

The slowdown in China`s economy has many economists predicting the country will ease monetary policy in 2012, but the moves may not be all in one direction, with one economist predicting the central bank will hike rates, even as it reduces the reserve requirement ratios (RRR) for banks.

Robert Prior-Wandesforde Head of India and South East Asia Economics at Credit Suisse is forecasting a 25 basis points hike in interest rates during the second-half of the year, as the People`s Bank of China (PBOC) seeks to normalize rates, which are currently negative in real terms. "Interest rates are extremely low and the deposit rate is negative in real terms so there is no incentive there to save, there is every incentive to take credit where it is possible," Wandesforde told CNBC on Friday. The one-year lending and deposit rates currently stand at 6.56% and 3.5% respectively, levels widely regarded as too low by economists. Wandesforde says concerns around inflation, which is currently at the top end of the central bank`s comfort range, is another factor that will lead the central bank to raise rates. While Wandesforde expects an interest rate hike this year, he says that the central bank will likely reduce the reserve requirement ratio (RRR) by 100 basis points over the course 2012, with a RRR cut possible as early as Friday. The reason China will continue to reduce bank reserve requirements, according to Wandesforde, is to free up liquidity for small to medium sized enterprises, which are having extreme difficulty gaining access to bank finance. "Unlike with interest rates, a RRR cut will be more effective because it directly frees up liquidity for commercial banks to lend...reducing the reserve requirements increases the quantity of money available," he concluded. Copyright 2011 cnbc.com