Sat, Dec 11, 2010 - Page 10 News List

China raises bank reserve requirement

GOING UP:Analysts said the move does not rule out the possibility of an interest rate hike in the next few days as the government seeks to ease inflation pressures


China’s central bank said yesterday it would raise the amount of money banks must keep in reserve as Beijing ramps up efforts to contain inflation, rampant lending and soaring housing costs.

The People’s Bank of China said it would increase the bank reserve requirement ratio by 50 basis points, marking the sixth such move this year and highlighting the growing anxiety among top leaders over inflationary pressures.

The move came after data -released earlier yesterday showed property prices and new lending remained stubbornly high last month, despite persistent government efforts to stem the flood of liquidity into the world’s second-largest economy.

The increased reserve requirement ratio will be effective from Dec. 20, the central bank said.

There had been mounting speculation that an interest rate hike or tighter lending restrictions were imminent after Beijing brought forward the release of key economic data for last month to today from Monday.

The figures are expected to show the country’s consumer price index, a key measure of inflation, rose by as much as 4.7 percent — the fastest pace in more than two years and well above the government’s full-year target for 3 percent.

High inflation has a history of sparking unrest in China and the government has already taken a range of steps to put the brakes on rising prices, including hiking interest rates in October for the first time since 2007.

Analysts said the latest move to curb bank lending did not mean an interest rate hike in the coming days was ruled out.

“The stated intention of the People’s Bank is to ‘normalize’ policy and the current elevated level of inflation means that a rate hike is still likely very soon,” Capital Economics said in a note.

The London-based research firm said the central bank may have deferred a rate hike until after the annual Central Economic Work Meeting, which reportedly began yesterday and is expected to end tomorrow.

The country’s top leaders attend the meeting to discuss economic policy for the next year.

The move came after official data showed property prices in 70 major cities recorded their third straight month-on-month rise last month, defying Beijing’s attempts to cool the red-hot market and avoid a damaging bubble.

Prices were up 0.3 percent last month from October and 7.7 percent higher than a year ago.

The value of new loans issued by China’s banks fell last month from October, but was still well above forecasts as Beijing struggled to stem a flood of liquidity.

Other data showed the country’s trade surplus shrank last month to US$22.9 billion, but the still-hefty number will add to the already large volume of money washing around the economy and fuel inflation pressures.

Royal Bank of Canada senior strategist Brian Jackson said an interest rate hike was still possible this weekend.

“We think Beijing will likely want to use all of the policy tools at its disposal to get inflation under control,” Jackson said in a note. “Inflation is shaping up to be the primary challenge facing policy-makers in coming months and it makes sense for them to bring out the big guns to deal with this issue.”

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