Central bank targets inflation
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The latest interest rate hike announced by the People's Bank of China highlighted the government's grave concern over soaring prices and its determination to contain the real estate bubble.
China's central bank decided on Saturday to increase the one-year benchmark lending and deposit interest rates by 25 basis points from the next day, the second increase this year.
Although there had previously been strong calls for rate increases in the context of the consumer price index (CPI) growth rate continually hitting a new high, Saturday's move was still beyond expectations. All previous messages transmitted by the country's central bank, including its decision on Dec 10 to raise commercial banks' reserve requirement, had suggested new interest rate hikes would be unlikely before the end of the year.
The rate hike was announced on the day when the United States and European countries were enjoying their Christmas holidays and their investment banks were unable to make a timely response.
The unexpected move showcased the central bank's intention of preventing its effects from being discounted because of possible advance market expectations. Giving days for Western countries to digest the possible effects of China's move should also help minimize the repercussions on the international financial markets.
As far as China's domestic market is concerned, the decision to raise interest rates again before the new year will help China stabilize inflation expectations next year. It will also help curb domestic property price bubbles.
The series of policies and measures adopted by the relevant State departments over the past months have curbed the momentum of soaring prices. It is expected that the CPI growth rate in December will fall from the 5.1 percent of November, which was a record high over the past 28 months.
Such a high-level CPI growth rate will obviously be unfavorable to the national economy next year, which is the starting year of the 12th Five-Year Plan period (2011-2015). It will also pose an enormous challenge to the country's economic restructuring and industrial upgrading drives.
However, in the absence of a long-term effective price stabilizing mechanism, the effects achieved by the temporary and emergency administrative means will soon subside and the momentum of price rises is likely to rebound at a time when the country's excess liquidity has not been fundamentally changed.
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