Forex

BEIJING (XFN-ASIA) - Rapid growth in money supply was the main reason why China's consumer price index (CPI) rose in February to its highest level in nearly 12 years, Goldman Sachs said.

The National Bureau of Statistics announced today that CPI rose 8.7 pct year-on-year in February, accelerating from 7.1 pct growth in January and marking the highest level since May 1996.

Goldman Sachs noted that severe snowstorms that struck much of China in January and February were partly responsible for the CPI rise, but the key reason was money supply growth. As such, CPI inflation is likely to remain elevated in the near term, it said.

'While we believe the snow storms contributed to the high February reading, we believe that rapid money supply growth has been the main driver of high and rising inflation,' Goldman Sachs said in a note.

It added that China's policymakers are likely to react soon with a combination of tightening tools.

These will include a modest interest rate hike, a more meaningful increase of the bank reserve requirement ratio, stricter controls on lending by commercial banks and foreign exchange inflows, as well as faster currency appreciation, Goldman Sachs said.