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Why frequent actions taken in monetary policy? |
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16:42, August 13, 2007 |
China raised the one-year deposit and loan interest rates by 27 basis points as of July 21 again after it had raised the interest rates on March 18 and May 19. Meanwhile, it has raised interest reserve requirement ratio for six times, basically once a month, to a total of three percentage points. The People's Bank of China (PBOC) has also widened the floating band of Renminbi yuan against US dollar for daily spot trading on the interbank market from 0.3 percent to 0.5 percent as of May 21.
Monetary policy has not only been enforced repeatedly but with "a few combinational strikes". PBOC announced the hike of interest rate, the raising of reserve requirement ratio and the enlargement of the floating band of yuan against US dollar on the evening of May 18, dubbed as the "shooting of triple arrows". On the evening of July 20, the benchmark one-year deposit and lending rate was increased by 27 basic points, and the tax rate on interest income was also to cut by 20 percent to five percent as effective on August 15, and this is referred to as the "simultaneous moves of the two rates" with regard to China's monetary and financial policies.
These moves represent merely the operation of non-daily financial policies, and the operation of daily financial policies are even more intensive. PBOC, or the central bank, issued 2.6 trillion yuan of bills in the open market in the first half of 2007, and the outstanding amount reached as high as 3.8 trillion yuan by the end of June, noted Dr. Peng Xingyun with the Institute of Finance under the Chinese Academy of Social Sciences. Meanwhile, he added, it also issued bills worth 303 billion yuan in a "punitive way" to some commercial banks with relatively rapid, marked increases in their issue of loans.
Pressures on price increase have been around to multiply, and excess fluidity has been still eminent since the beginning of the year. The consumer price index (CPI), the main gauge of inflation, rose 3.2 percent year on year and, in June, CPI jumped by 4.4 percent as compared with a year ago. Although CPI was prompted by the price of food, and price of pork in particular, the core CPI, nevertheless, rose by 0.9 percent only with the deduction of food and energy. But as the engel's coefficient of residents in China (i.e. the proportion of food consumption of family to CPS) is rather high, and the food price make up about one third of the CPI proportion and is the main force to fluctuate the food prices from a historical point of view. The sustained rise of food price will heighten the cost of living for residents and cajole inflation anticipation.
Further analyses indicate more risks for the price rise. So it is unlikely for food prices to fall within a short period in the later half of the year but for the cost of labor force to rise, and there are also pressures on the rise of price for energy. At present, there is a trend for price increase of principal resources and production factors, and so it is likely to lead to the rise of an overall price level to some extent.
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