Tue, Aug 02, 2011 - Page 10 News List

Too early to ease monetary policy: China central bank

Bloomberg

China’s central bank said it is too early to relax monetary policy, countering speculation it may cut the amount of cash the nation’s lenders must set aside as reserves.

“Domestic inflation expectations remain strong and the foundation for stabilizing prices is not solid,” the People’s Bank of China (PBOC) said in a statement on its Web site yesterday.

“Prices could rebound” if the bank’s prudent monetary policy stance is “relaxed,” it said.

Inflation accelerated to a three-year high of 6.4 percent in June driven by a 14.4 percent surge in food costs. Speculation the PBOC would reduce the reserve requirement from record levels spurred a surge of as much as 2 percent in a gauge of financial shares listed in China on July 29.

The fundamentals of economic growth are “still good,” the central bank said in the statement posted on its Web site after internal meetings to discuss its tasks for the second half. Stabilizing prices will be a priority, it said.

The central bank will “continue to implement prudent monetary policy with the necessary intensity,” according to the statement.

China has raised interest rates five times and increased the reserve requirement for banks nine times since starting in the third quarter to curb lending and rein in gains in prices. The adjustments to reserve ratios, which force banks to keep more of their deposits at the central bank, have withdrawn 3.3 trillion yuan (US$512.76 billion) of cash from the banking system, according to Barclays Capital Asia Ltd.

The central bank also said yesterday that China would allow market demand and supply, and the basket of currencies against which the yuan is measured, to play a bigger role in determining the currency’s exchange rate.

The PBOC reiterated that the government would improve the yuan’s exchange rate mechanism, without giving more details.

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