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Yi Gang, assisstant governor of the People's Bank of China, the central bank, said further observations are needed to decide whether to raise the interest rate as the current CPI rise fueled by a jump in grain prices was not sustainable. [newsphoto]

China's central bank Sunday ruled out an immediate interest rate rise amid speculations that the surging Consumer Price Index (CPI) may force the regulators to act, a news report said Monday.

The People's Bank of China needed further observations to decide whether to raise the interest rate as the current CPI rise fueled by a jump in grain prices was not sustainable, said Assistant Governor Yi Gang at a forum hosted by Peking University, according to the Beijing Morning Post.

In spite of a mild 1.5 per cent growth for the whole year of 2006, the Consumer Price Index surged 2.8 per cent year-on-year in December, the biggest increase in two years and much higher than market expectations.

Speculations are mounting that the central bank may raise interest rates to curb the inflation, contributing to recent stock market falls on Fridays as the central bank usually announces interest rate changes on Friday evening.

The CPI hike came after a significant reduction in world grain output led to an increase in international grain prices, pushing the related Chinese prices higher.

Concerns of equity market bubbles also raised the possibility for an interest rate rise. China's benchmark Shanghai Composite Index surged more than 130 per cent in 2006 in a bull run.

"I think the current CPI rise caused by grain price hike is only temporary," Yi Gang told the forum, casting doubts about the continued grain price rise. "China has had a bumper grain harvest for three years in a row and the possibility for a continued major price rise is small."

Besides CPI, the central bank also takes close looks at the Producer Price Index and imports prices when measuring inflation, Yi added. "The central bank sticks to prudent monetary policy. Further observations are needed to decide whether to raise interest rate."

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