Beijing: China may raise its benchmark interest rate in the third quarter to contain inflationary pressures, a media report said 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, reports say.

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 government has asked banks six times this year to hold more of their deposits in reserve to remove excess liquidity, despite little evidence that the steps helped tame prices.

Cao Yuanzheng, BOC's chief economist, said that interest rate hikes are the country's preferred method of tackling inflation, which 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 that 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 labour 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.


(Agencies)