Inflation is likely to ease in the next couple of months, central bank governor Zhou Xiaochuan has said.

He did not rule out the possibility of an increase in the interest rate.

An employee places vegetables on shelves at a supermarket in Beijing on June 4, 2008. Central bank governor Zhou Xiaochuan has said that inflation is likely to ease in the next couple of months. [Asianewsphoto]

Inflation could ease in the summer months because "we've got a good harvest, and some supply policies have started bearing results," Zhou said on Sunday on the sidelines of the annual general meeting of the Bank for International Settlements in Basel, Switzerland.

Zhou Xiaochuan

"But we know prices of energy and other commodities across the globe could put additional pressure on inflation in China," the head of the People's Bank of China (PBOC) said, referring to the unprecedented surge in crude price that touched 3 a barrel yesterday.

The PBOC, however, will take steps to stabilize prices when the situation demands. "We have several choices such as using the monetary policy, including market operations, central bank bills and reserve requirements."

Analysts interpreted his remarks as a sign that the interest rate would be raised to fight inflation. Though inflation dropped to 7.7 percent in May from 8.5 percent in the previous month, it remained high at 8.1 percent for the first five months.

"It (increase in interest) is always possible ... We don't exclude any possibilities," Zhou said yesterday.

The pressure of inflation is high, especially after the government raised the prices of petrol and diesel late last month, Liu Dongliang, currency analyst of China Merchants Bank, said.

The increase in electricity tariff for commercial establishments from today is also expected to add to that pressure.

Some emerging market economies have already raised their interest rates, and the European Union is expected to do the same.

This will divert some pressure from the interest differentials between the US and China if Beijing raises the interest rate, Liu said.

Many experts fear that more speculative capital may flow into the China if the differentials widen.

Though the market has taken an increase in the interest rate as imminent, Zhang Jun, the head of Fudan University's China Center for Economic Studies, said it would be better if it is done after the Olympic Games.

"There is certainly inflationary pressure, but this is not the right time to raise the rate," he said, because the tightening of the monetary policy is working well.

Sun Mingchun, senior economist of Lehman Brothers Asia, agreed. Daily and weekly data of relevant departments show overall food prices either remained unchanged or fell slightly in June, he wrote in a media note.

"We expect inflation to fall to 7.5 percent year-on-year in June, possibly between 7.2-7.8 percent If that happens, the decline should reduce the urgency for an interest rate increase in the short term."

The central bank set the yuan's central parity rate at 6.8591 against the US dollar yesterday, a new post-revaluation high.

Zhou's remarks that China will promote the yuan's flexibility gradually after his meeting with East Asian, Pacific and European central bankers in Rome, might have helped the yuan gain strength, media reports said.