China's consumer prices may pick up next year led by a rise in food prices on growing urban demand and supply constraints, a trend that could prompt the central bank to hike interest rates, economists said.

The country's consumer price index (CPI), an inflation gauge, will likely advance 3.0 percent in 2007, the Standard Chartered Bank said in its latest economic review.

That compares with the bank's previous projection of two percent, set to be higher than a widely estimated 1.5 percent increase for the year.

"Food prices are on the rise, both in China and globally," said Stephen Green, Standard Chartered's senior economist, in the report. "This is important for China particularly since food makes up 33 percent of the CPI."

The report said one driver behind the consumer-prices upswing would likely be the grain inflation, which is overall running at three percent to four percent year-on-year "after a more-or-less stable 2006."

Another factor that could push up inflation lies in continued large trade and current-account surpluses next year and in 2008, Standard Chartered said.

The central bank's move to issue 100 billion yuan (US$12.8 billion) to 150 billion yuan in fixed placement bills by the year's end "was an indication of the concern out there."

"On the rate outlook, these food pressures have pushed us over the edge," said Green, who expects the central bank to raise both benchmark lending and deposit rates by 27 basis points in the first half of next year.

But "the pressures from the food side should dissipate as we head into the second half of 2007," he said.

Editor: Yan