From Chinese Press

Interest raised to check inflation

(China Daily)
Updated: 2010-10-22 09:08

China's central bank has raised the interest rates from Oct 20, signaling that it is committed to curbing inflation and market liquidity, says an article in Beijing News. Excerpts:

People's Bank of China (PBOC) raised the benchmark interest rate of deposits and loans by 25 basis points from Oct 20, which means the interest rate on one-year deposits will now be 2.5 percent and on one-year loans, 5.56 percent.

This is the first time in nearly three years that the central bank has raised the interest rate, and the move is seen as an attempt to combat inflation and free the market of excess liquidity.

Keeping inflation under check is the basic aim of China's monetary policy. Since the consumer price index rose at a fast pace in the past few months, PBOC had to take measures to control market liquidity and avoid hyperinflation.

But wouldn't a higher interest rate cause more hot money to flow into the country and compel the government to revaluate the yuan? It may, but since inflation is now the greatest enemy of the Chinese economy, the government had no choice but to raise the interest rate.

The PBOC move reflects a change in the government's monetary policy from easy to moderately tight. The authorities hope that a higher interest rate would help bring down housing prices to real levels.

The increase in the interest rate is rather mild and may not cause excessive hot money to flow into the country and prompt a revaluation of the yuan. But to further deflate the bubble in the property market and check inflation, the authorities could raise the interest rate again.