Will China's Next Move Be a Rate Hike?

After bold stimulus measures by the world’s major central banks all eyes are now on China to come up with a monetary boost to bring momentum back into its economy, but one expert expects quite the contrary. He tells CNBC the next major policy move from China will likely be an interest rate hike.

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According to Zhang Zhiwei, Chief China Economist at Nomura, the People’s Bank of China (PBOC) will leave rates unchanged for the rest of 2012, and raise borrowing costs twice in the second-half of 2013 due to rising inflationary pressures.

The PBOC last moved on rates in July when it cut the one-year lending rate by 31 basis points to 6 percent.

The third quarter will mark the “bottom for the economy,” which is already heating up, Zhang told CNBC Asia’s “Squawk Box” on Thursday. He added that the inflation rate was already on an upward trend which would drive the PBOC to increase interest rates.

China’s annual inflation rate moved up to 2 percent in August after hitting a 30-month low of 1.8 percent in July. And, Zhang sees inflation at over 4 percent in 2013, much higher than the consensus forecast of 3.4 percent.

“The surge in global food prices is also likely to push up pork and edible oil prices in China,” Zhang said.

In the PBOC’s latest monetary policy report, the central bank also warned that inflation will rebound gradually from August onwards as a result of monetary loosening earlier in the year.

Bullish on Growth

Zhang also said there would be a spurt in economic growth in the fourth quarter. He forecasts gross domestic product to expand 8.8 percent in the last three months of the year, one of the most bullish projections for China growth.

He expects infrastructure investment to support this growth. Earlier this month the government approved more than $150 billion in infrastructure spending.

“The economy started to show some positive signs from the leading indicators, particularly in the housing sector. Housing is 27 percent of China's investment,” he said, pointing to a pickup in land sales, transaction volumes and housing starts in August.

New housing starts, for example, rose 14 percent year-on-year in August from a 27 percent decline in July.

The latest economic indicator out of China, HSBC’s Flash Purchasing Manager’s Index (PMI), which measures factory activity, edged up slightly to 47.8, from the final reading of 47.6 in August. A reading above 50 indicates expanding activity, and one below 50 signals contraction.

Zhang said China’s PMI data should show further improvement in October and November as the economy picks up momentum.

By CNBC’s Ansuya Harjani