China Monetary Policy

China

China: Central Bank tightens policy twice in less than one month

November 19, 2010

On 19 November, the People's Bank of China (PBOC) raised the reserve requirement ratio (RRR) for commercial banks by 50 basis points to 18.0%, effective 29 November. This move followed on a previous RRR hike of the same amount announced on 10 November, which was effective on 16 November. The decision of further tightening monetary policy was taken less than one month after the PBOC unexpectedly raised interest rates on 19 October, and indicates its commitment to cool the expansion in commercial banks' lending. The Central Bank has repeatedly hiked the reserve requirement ratio in recent years and the measure is aimed at reducing liquidity in the inter-bank market. The move underlines the government's concerns about accelerating inflation, which reached a two-year high and surpassed this year's target for a fourth consecutive month in October. Moreover, on 17 November, the State Council announced ?price control guidelines to reassure consumers facing rising inflation?. The measures include support to agricultural production, reduction in energy prices aimed at guaranteeing sufficient supply, and temporary subsides for needy families. The authorities would also ?impose temporary price controls on important daily necessities and production materials when necessary? in addition to improving market supervision on speculation in major agricultural products. Furthermore, the government announced that it would put state reserves of grains, edible oils and sugar on the market in order to guarantee supplies.

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