China Monetary Policy


Central Bank hikes interest rates and reserve requirements in order to curb rising inflation

In February, the People's Bank of China (PBOC) further tightened its monetary policy stance. First, on 8 February the PBOC raised the benchmark interest rate by 25 basis points to 6.06%. Following on this move, on 18 February, the Bank announced it intended to hike commercial banks' reserve requirement ratio (RRR) by 50 basis points to 19.5% in a decision broadly expected by market analysts. The move represents the third interest rate hike since October 2010 and the eighth RRR increase since the beginning of 2010. The decision to raise interest rates was taken before the January release of consumer price data, which showed that average inflation continues to accelerate toward the 4.0% target set for this year. The surge in consumer prices can be largely attributed to rising food prices, but the recent pick-up in non-food prices suggests that signs of overheating in the Chinese economy are becoming more prominent, prompting the PBOC to further tighten monetary conditions.

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