Monetary Policies

The central bank announced a 0.25-percentage-point increase effectiveThe People’s Bank of China(PBOC)， the central bank， announced on April 5th that it would raise bank’s benchmark one-year borrowing and lending rates by 0.25 percentage points effective April 6th; rates of other deposit and lending and Personal Housing Accumulation Fund Loan would also be adjusted accordingly. Loan rate for terms of more than three years would climb by 0.20 percentage points， with a smaller scale than deposit rate of the same terms.Bank’s benchmark one-year borrowing and lending rates would be raised to 3.25 percent and 6.26 percent respectively; and demand deposit rates would increase by 0.1 percentage points to 0.50 percent. This was the second time for the People’s Bank of China (PBOC) to raise interest rates and also the fourth increase since the restart of this round of interest rate hike.Analysts reckoned that it was in line with the market expectation to raise interest rates after the Tomb Sweeping Day， suggesting the existence of unrelenting price pressure.Lu Zhengwei， a senior econo- mist with Shanghai-based Industrial Bank Co.， held that to tame inflation remains the priority of macroeconomic control; the primary cause underlying this rate hike is to maintain a strong monetary policy. 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. The domestic inflation pressure was still considerable. It’s expected that Consumer Price Index (CPI) will be on the rise.What’s more， generally China’s economy will continue to grow fast， though the Purchase Management Index (PMI) shows a slowing link relative ratio of economic growth. The expected growth rate of China’s economic growth in the first season is about 9.5 percent. It’s unnecessary to worry much about the negative impact of interest rate hike on economic growth.Monetary policies unlikely to easeThe announcement made by the People’s Bank of China (PBOC) on April 5th to raise bank’s benchmark one-year borrowing and lending rates marked the second rate increase this year. Analysts say the increase is in line with market expectations. Monetary condition for the prices hike is clearly constrained by the strict con- trol of PBOC. Inflationary pressure， however， should not be underestimated.The current monetary policy focused on curbing high inflation. It’s still possible for interest rates， reserve requirement ratio， and exchange rate to grow. Monetary policies in the second season or in longer terms are hard to ease.The possible new high of CPI growth rate in March is the direct cause for the PBOC to raise interest rate this time. Judged by the data of recent years， food prices usually fall back in March along with the pass of the Spring Festival.Food prices in March， however， still rose slightly. Unexpectedly， prices of piglets and pork jumped after the Spring Festival. The increases of sugar and meat prices offset the dropback of the prices of eggs， vegetables， etc. Internationally， the rise of crude oil price and the severe earthquake in Japan were all causes for the rise of China’s CPI in the short term.The regulation and control by monetary policies were carried out successfully. “Monetary condition” is evolving according to the target set by the PBOC in the beginning of this year. Still to secure the success and combat inflation， monetary policies for the next stage are hard to ease.Firstly， the lower coupon rates of the central bank’s bills than the yields on the secondary market are reversed and Central Bank Bill resumed issuance. In March， the PBOC realized a net withdrawal of 271 billion yuan in the open market， the first time for the PBOC to realize monthly net withdrawal since September 2010. The PBOC increased its activeness and controllability to drain liquidity， which will ease the pressure of reserve requirement ratio increase and the impact on market.The matured fund in the open market in the second season has reached 1，668 billion yuan， exceeding 1，650 billion yuan in the first season. What’s more， the final figure will be much larger. Operations in the open market will expectedly be the major force to reduce excessive liquidity in the next stage.Secondly， large commercial banks are now subject to required reserve ratios of at least 20 percent， still lower than the theoretic “ceiling value”. The continually lowering interest rates in monetary market also suggest much liquidity. However， a structurally tightening liquidity is forthcoming.On March 15， six-month fixed deposit of 30 billion yuan by the central treasury cash management invited public bidding. The interest rate of successful bid was as high as 6.23 per- cent， even higher than the 6.06 percent benchmark one-year lending rates， suggesting the financial strain faced by some commercial banks. To further raise reserve requirement ratio will put some medium and small commercial banks at the risk of liquidity management.However， in the open market 911 billion yuan is set to mature in April. Open market operations only can hardly reduce the excessive liquidity. The reserve requirement ratio will possibly be further raised.Thirdly， the implementation of interest rate tool will be restrained after this rate hike， however it’s still possible for interest rate to increase this year to tackle negative interest rate and tame inflation. There’s still inflationary pressure in the second season， with CPI growth rate of more than 5 percent， even 6 percent， each month. Because of lessening carryover effects in the latter half， market generally anticipate that CPI increase rate will begin falling af- ter reaching the top.However， the possible further increase of bulk commodity prices and the rising domestic labor cost will put much challenge to the scale and trend of the drop of inflation. What’s more， rate hike is helpful for securing the regulation effect of the real estate market.Last but not least， exchange rate of RMB is expected to keep a rising trend. The central parity rate of the Chinese currency Renminbi (RMB)， or the yuan， against the U.S. dollar rose by 1.01 percent accumulatively in the first season， but the effective exchange rate of RMB remained relatively stable.Ever since mid-March， the appreciation of RMB has been accelerating， possibly caused by the weakening dollar， deemed analysts. The appreciation will not impact China’s export significantly. The exchange rate of RMB is expected to keep a fast rising trend in the future. It’s possible that the appreciation rate in the whole year will exceed 5 percent.