Interest Rate Raised as Expected

The People’s Bank of China(PBOC)， the central bank， announced on April 5th that it would raise bank’s benchmark one-year deposit and lending rates by 0.25 percentage points effective April 6th; rates of other borrowing and lending would also be adjusted accordingly. This was the fourth adjustment by the PBOC since last October and hereafter one-year deposit rate was raised to 3.25 percent and one-year lending rate to 6.31 percent.The rate rise was announced at a time expected by the market. Experts say the adjustment was in line with market expectations at a time when the March Consumer Price Index (CPI) continued to go upward and it also showed that the central bank still hold to a tight monetary policy. Reporters from International Finance News once predicted that next interest rate raise would be announced around the Qingming Festival.The adjustment in line with market expectationsThe adjustment was announced by the PBOC only days before the market expectation. In an interview with reporters from International Finance News， Xi Junyang， Deputy Director of the Research Center for Modern Finance of Shanghai University of Finance and Economics， remarked that“market generally had believed that the announcement would have been made at the weekend by the PBOC， however as yesterday (April 5) was the last day of the Qingming Festival， there would be some time before the market could adjust to the raise. Therefore， as for the impact on the market， there’s no difference whether the announcement was made on Tuesday (April 5) night or at the weekend.”“The PBOC chose to announce the adjustment at this time mainly because of the serious impact brought about by hiking prices and excessive market liquidity，” said Mr. Xi.Currently many research institutes and analysts predicted that Consumer Price Index (CPI)， a major gauge of inflation， would surpass 5 percent in March， with most predicted figures ranging from 5 percent to 5.4 percent. Lu Zhengwei， a senior economist with Shanghai-based Industrial Bank Co.， said the domestic inflation pressure was still considerable.“Internationally the crude oil price is still higher than 100 dollars and the Food and Agriculture Organization of the United Nations (FAO) expected high food prices in the future. It’s expected that Consumer Price Index(CPI) will increase by about 5.2 percent， registering a new high.”Xi Junyang pointed out that“the upward trend of inflation would maintain for a period of time. In order to manage the inflation expectation， the PBOC constantly tightened monetary policies recently. Currently both businesses and consumers hold a high expectation for inflation and have been taking measures for the possible inflation. If such expectations can not be reduced， the upward trend of inflation will be hard to reverse.”Firm to tighten monetary policiesThe China Quarterly Macroeco- nomic Outlook: Q2 2011 released by the PBOC stated that the stagflation risk for Chinese economy was grave; macroeconomic control should not only be effective but also moderate. Zhen Feng， an analyst at the International Finance Institute of the People’s Bank of China， remarked that “if monetary policies are tightened too fast or too tight， real economy might be hurt and cannot achieve a soft landing.”However， Mr. Lu said generally China’s economy is unlikely to decline， in spite of a slowing link relative ratio of economic growth showed by the Purchase Management Index (PMI). The expected growth rate of China’s economic growth in the first season is about 9.5 percent. Overall growth is still strong.In an interview with reporters from International Finance News， Qu Hongbin， HSBC’s Chief Economist for China and Co-head of Asian Economic Research， “a 9 per cent GDP growth rate will be more beneficial for China’s economic development than a 10 percent growth rate. To tame inflation remains the priority of macroeconomic control. Inflation rate cannot be lowered in the latter half of the year unless the present tightening strength is maintained for the next three to four months.”Lu Zhengwei predicted that“bank’s benchmark one-year deposit rate would be raised to between 3.75 percent to 4 percent， suggesting that there would be two to three adjustments besides this one. At the same time， reserve requirement ratio， which is calculated based on the four nationalized banks， i.e. the Bank of China， Agricultural Bank of China， China Construction Bank， and Industrial and Commercial Bank of China Limited， would be raised to around 23 percent. Reserve requirement ratio is expected to rise again in April.”(Author: from International Finance News)