Economy

More monetary tightening needed to tackle inflation

(Xinhua)
Updated: 2011-04-14 09:59

NEW YORK -- Stephen S. Roach, chairman of Morgan Stanley Asia, told Xinhua on Wednesday that in order to boost domestic consumption, China needed more aggressive monetary tightening to deal with inflation.

Roach said it at the 25th Anniversary Hyman P. Minsky Conference, held by Ford Foundation on Wednesday in New York.

He stressed that China's 12th Five-Year Plan was a strategic framework aimed at changing the economy's remarkably successful growth structure of the past 30 years into a pro-consumption model, which can be supported from China's 1.3 billion consumers.

However, Roach pointed out that if China doesn't bring inflation under control, it might be unable to implement its pro-consumption rebalancing agenda.

"The price stability was listed as No.1 problem in China - just ahead of efforts to stimulate consumer demand," he said, "This prioritization is critical."

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According to Roach, with inflationary pressures increasingly broad-based, it made sense for the anti-inflationary policy prescription to have a comparable breadth.

He suggested that Chinese authorities need to shift more of their efforts to monetary tightening and higher real interest rates -- long viewed as the heavy artillery of any nation's anti-inflation campaign.

He predicted that the central bank might increase interest rates several times rather than raise banks' reserve ratio within 2011.

"While the central bank of China has hiked policy rates three times in the past four and a half months, the one-year benchmark lending rate of 6.1 percent is only about 1.2 percentage points above the headline inflation rate," he said, adding that it was clearly not high enough to rein in excessive growth in credit.

He then said that the real benchmark policy rate remains in the accommodative zone - possibly at least 100 basis points below the more restrictive reading that would be required to cool the economy and temper inflationary pressures.

"The sooner China brings inflation under control, the sooner it can put the wage piece of its consumer-led growth agenda into place," he added.