China has again tightened monetary policy to battle still high levels of inflation.
The country’s central bank surprised the world with yet another rate rise yesterday, the fourth in nearly six months.
The last rate rise was in February and before that on Christmas Day and the first in this series was in last October.
The benchmark one-year lending rate will increase to 6.31% from 6.06%, effective today.
The one-year deposit rate rises to 3.25% from 3%, which remains well under the 4.9% annual inflation rate.
Chinese investors know that if they deposit funds in banks their returns will be undermined by the higher rate of inflation, hence the continuing strong investment in property and housing.
In addition to raising rates, the central bank has told banks to boost their reserve asset ratios (the amount of deposits the banks must leave in reserve with the central bank) nine times since the start of last year, to try and control bank lending and property prices.
The highest reserve ratio is now 20% for the country’s biggest banks (and around 18% for smaller banks).
Analysts said last night that the increase suggests that March inflation data, due for release early next week, would be higher than expected.
Consumer price inflation in China rose 4.9% in the year to February, unchanged from January and down from the 5.1% annual rate in late 2010.
But politically sensitive food prices jumped 11% in the year to February and producer prices rose 7.2%, the fastest rise since October 2008.
As expected, the Reserve Bank left its cash rate on hold yesterday at 4.75%, and didn’t really tell us any more about the health of the economy than we already knew.
In fact yesterday’s trade figures (a surprise deficit in February, thanks to a big rise in oil imports) and solid car sales for March, told us a bit more about where the economy is than did the post board meeting statement which was a re-run of the March statement. (See stories below).
"At today’s meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate in view of the general macroeconomic outlook," the post-meeting statement from Governor Glenn Stevens concluded yesterday.
The bank again told the market that it will look through the expected high inflation figures for the March quarter due to be released later this month (and for the June quarter as well).
"Inflation is consistent with the medium-term objective of monetary policy, having declined significantly from its peak in 2008.
"These moderate outcomes are being assisted by the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets, which have worked to offset large rises in utilities prices.
"Production losses due to weather are temporarily raising prices for some agricultural produce, which will boost the March quarter CPI, but these prices should fall back later in the year.
"Overall, looking through these temporary effects, the Bank expects that inflation over the year ahead will continue to be consistent with the 2–3 per cent target."
In essence, the statement was a repeat of the one issued after the March board meeting and now means the RBA sat on rates for the longest period since 2006.
"Australia’s terms of trade are at their highest level since the early 1950s and national income is growing strongly. Private investment is picking up, mainly in the resources sector, in response to high levels of commodity prices. In the household sector thus far, in contrast, there continues to be caution in spending and borrowing, and a higher rate of saving out of current income.
"The natural disasters over the summer have reduced output and the resumption of coal production in flooded mines is taking longer than initially expected.
"Production levels should, however, recover over the months ahead, and there will be a mild boost to demand from the rebuilding efforts as they get under way.
"Asset values have generally been little changed over recent months and overall credit growth remains quite subdued, notwithstanding evidence of some greater willingness to lend.
"Business balance sheets generally are being strengthened, and the run-up in household leverage has abated.
"Growth in employment has moderated over recent months and the unemployment rate has held steady at 5 per cent.
"Most leading indicators suggest further growth in employment, though most likely at a slower pace than in 2010.
"Reports of skills shortages remain confined, at this point, to the resources and related sectors.
"After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn," Mr Stevens said.
