Opinion

No time for policy pause

(China Daily)
Updated: 2011-04-07 15:19

The second interest rate hike so far this year highlights Chinese policymakers' determination to firmly check inflation even as the risks to global growth keep increasing.

Tentative signs indicate that China's economy is slowing, but they are far from compelling enough to justify a pause in monetary tightening. Instead, growing uncertainties about global growth should propel the Chinese government to prepare more action for preventing imported inflation.

The People's Bank of China raised one-year deposit and lending rates by 25 basis points on Tuesday.

The fourth interest-rate increase in less than six months came at a moment when the country's domestic fight against inflation is beginning to bear some fruit.

Thanks to the frequent increase in the bank reserve requirement as well as the steady rise in interest rates, a purchasing managers index released on April 1 indicated that the world's second-biggest economy is growing smoothly, with a very moderate slowdown.

More importantly, the government's unprecedented efforts to avoid property bubbles have seemingly helped slow, if not revert, the seemingly unstoppable surge in property prices in major Chinese cities.

Related readings:  China hikes rates against inflation PBOC cuts yuan clearing interest rates in HK  Possible rates hike hits equities

Though the country's consumer inflation remained disturbingly high, 4.9 percent for both January and February, and is expected to exceed 5 percent in March, the gradual slowdown of the national economy and a cooling property market will lay a solid foundation to address the domestic factors.

Yet the worsening global growth outlook has made it far too early to take it for granted that China's pace of consumer-price gains will slow as expected.

On one hand, the "two-speed recovery" of the world economy, with developing economies rebounding quickly while the United States and Europe struggle to maintain growth, can hardly last long. Excess liquidity from some rich countries will sooner or later force developing countries into a tight corner in their fight against inflation.

On the other hand, the turmoil in the Middle East and North Africa and the earthquake, tsunami and nuclear power plant crisis in Japan have made it more difficult to avoid drastic fluctuations in international commodities prices.

Even if China can promptly deal with the overabundance of bank credit, a main cause of inflation, external factors such as soaring oil prices as well as increased inflows of "hot money" will add uncertainties to the ongoing war against inflation.

The glacial pace of the reform of the global monetary and financial system means that developing countries still can do little to tilt the international markets in line with their domestic needs. Hence, they should fight inflation without worrying too much about overshooting.