China Monetary Policy


China: Central Bank tightens the reins to temper inflation

April 5, 2011

On 5 April, the People's Bank of China (PBOC) hiked interest rates for the fourth time in six months to tame rising inflationary pressures. The authorities decided to raise the benchmark interest rates by 25 basis points to 6.31% for one-year loans and to 3.25% for one-year deposits, in a move broadly expected by the market. The decision was taken just a few days before the release of consumer prices figures for March, triggering concerns ? later confirmed - that inflation continues to rise. The PBOC is facing the challenge of tempering inflationary pressures without choking off economic growth. Recently, Premier Wen described inflation as a tiger, which, once free, is difficult to put back in the cage. In a related move, on 17 April, the PBOC also announced another raise in the reserve requirement ratio (RRR) by 50 basis points to 20.5% for the biggest lenders, which will be effective from 21 April. The April RRR increase represents the fourth this year and accumulates 500 basis points since January 2010. Meanwhile, on 12 April, Fitch downgraded China's long-term currency outlook to negative, citing ?a high likelihood of a significant deterioration in asset quality in the Chinese banking system in the next three years?. It is the first time that a credit rating agency has downgraded China since July 1999


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