Inflation Now Policy Concern No. 1

More evidence of the growing concern about inflation among China’s economic policymakers. The People’s Bank of China announced another rise in the reserve requirements for banks only hours after word of October’s larger than forecast trade surplus, at $27.1 billion. A 0.5% increase to 18% will come into effect on Nov. 16.

This is a move to drain liquidity from the system more than one to fatten the banks’ cushion against bad debts. Inflation in October is thought to have hit 4% year-on-year, a two year high. Few officials now expect the full-year number to come in anything but above the 3% target. Hot money from investors speculating on the yuan’s revaluation, foreign exchange reserves that now top $2.6 trillion and the side wash from quantitative easing elsewhere all risk reinflating the asset bubbles that the central bank has been working hard to let down without mishap.

Liquidity management has forced itself to the center of the central bank’s policy concerns. While this was the fourth rise in reserve ratios this year, we believe a further rise in benchmark interest rates to follow last month’s surprise increase, the first in nearly three years, is also likely sooner rather than later.

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Filed under Economy

2 responses to “Inflation Now Policy Concern No. 1

  1. Pingback: China Formally Switches Monetary Policy To What It Already Is | China Bystander

  2. Pingback: Setting The Scene For A Higher Inflation Target | China Bystander

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