Important Turning Point in Monetary Policy

Interest rates that began to both anti-inflationary monetary policy and anti-foam, downside risks to the recent increases in asset prices, but not to the point of collapse

Since the beginning, many economists have been calling for monetary tightening. However, the October 19 decision to raise the number of bank deposit and lending rates, or contrary to many people’s expectations. The policy change from the last interest rate increase has been nearly three years, and that several major current global and Asian economies, monetary policy adjustments are in wait state. Therefore, the Chinese central bank rate hikes seem rather unusual.

The interest rate the central bank may be to give the market a number of important policy signal. First, policy makers worried about inflation than the official data may indicate the degree; Second, the Chinese government may be trying to avoid re-take the easy monetary policy in Japan to create serious asset bubbles in the old; Third, the RMB appreciation trend will continue; Finally, the “hot money” may increase the pressure. Therefore, the government can not rule out the temporary tightening of controls on short-term capital flows possible.

Of course, the policy change just started, how these trends will continue, remains to be seen. However, if the above interpretation is correct, monetary policy has been in 10 months there was a qualitative change. Simply out of fear of monetary policy affects economic growth, fearing to increase pressure on appreciation of the situation, and instead take active measures to prevent inflation, tightening, anti-foam. This shift, for the protection of long-term economic growth and avoid repeating the mistakes of Japan are very critical.

Fully estimate the risk of inflation

September this year, CPI rose 3.6% over the previous month’s growth rate increased 0.1 percentage points, but generally the central bank is still in the vicinity of 3% inflation target. Currently, inflation pressure rising food prices was mainly due to relatively fast, non-food prices has been relatively stable. Therefore, some experts believe that the current inflationary pressure is not great.

However, the official inflation figures two problems: First, official statistics tend to attach importance to year changes, but on economic decisions, the ring is more important than the data because they can more accurately reflect the short-term trends. In recent months annualized rate of CPI after the chain has been well above the central bank’s target. Second, official statistics may not reflect the actual inflation pressure, for example, recently the service sector rose faster than product prices in the consumer price index in the proportion of low. CPI rose after adjustment, significantly higher than the official data.

In determining the outlook for inflation, we should not underestimate the rise in food prices could cause global impact. Although the food price volatility is often because of special factors such as climate change, but occurred over the past 30 years, several more serious inflation, almost always starting from the rise in food prices, food prices pushed up the price of general expected. Also, according to the Ministry of Commerce of the market survey data collected weekly from the end of June to 9 at the end of three months, agricultural food prices have risen by 7.1% annualized rate of 32%. If the CPI as an alternative to the food price index, even if we do not consider non-food prices, CPI annual rate has exceeded 10%.

Lead to high inflation pressures were also two other important factors. Rapid rise in wage levels, help to stimulate consumption and improve the economic structural imbalances, but also no doubt will drive inflation higher. The second half of the country last year, a shortage of migrant workers there, this year the average wage increased by 20%. Therefore, since the beginning of this year, fixed-asset investment and industrial production value-added growth has begun to decline, the total social retail sales growth has been stable at 18% level. Shift from the surplus as the labor market shortages, rapidly rising wages may be a long term phenomenon.

Awash with liquidity, the potential risk of inflation is even more prominent. China since the end of 2008, an extremely loose monetary policy introduced in 2009, total new loans reached nearly 10 trillion yuan, almost the beginning of the central bank target of 2 times. 2010 loan growth has slowed, but still may exceed the central bank in the year beginning to set target of 7.5 trillion yuan. So much liquidity, risk bubble economy is very large, from last year’s stock of housing to this year’s green beans, garlic, cotton and sugar, the price turns up. Government officials around the attack, struggling to crack down on “unscrupulous traders”, causing the price bubble of the “culprit” is too loose monetary policy. It can be seen, October 19 the central bank to raise interest rates, in fact, is the logical thing.

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