Lessons from the PBC

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Lessons from the PBC

The Chinese central bank delivered an unwelcome Christmas gift to global financial markets, raising its benchmark interest rate by a quarter of a percentage point for the second time in slightly more than two months.

The move suggests that Chinese authorities are looking to ease inflationary pressure. Consumer prices in China in November hit a 28-month high of 5.1 percent, way over the country’s target of 3.0 percent.

The rate hike - following the Oct. 19 raise, which marked the first such increase in nearly three years - also signifies the limits of quantitative measures in curbing liquidity.

The People’s Bank of China had increased reserve ratios six times this year to fend off inflows of hot money seeking higher returns from yuan-denominated bonds and to stem the yuan’s appreciation.

But the central bank shifted to a strategy focused on tightening monetary policies to combat inflation by raising interest rates, even though doing so could lead to an influx of foreign capital and a stronger yuan.

The surprise rate hike not only underscores China’s inflationary concerns but also highlights its confidence in the pace of the country’s economic growth.

Chinese authorities have been faithful to the monetary theory of raising the rate incrementally every two months until it reaches the target level. Along the way, they have proved that actions speak louder than words.

The governor of the People’s Bank of China had been somewhat opposed to a further tightening of monetary policies, but the central bank nevertheless raised the key rate when inflation failed to come down in the end.

The Bank of Korea has so far been under fire for missing the boat when it comes to taking monetary actions.

Up until now, it has in a sense kept the blinker on too long without changing lanes, thereby losing credibility in the market.

China’s monetary moves may pressure the Korean central bank to take similar actions to rein in inflationary pressure, particularly in the current situation where both international raw material prices and local consumer prices are rising quickly.

At a time like this, the health of the economy depends on actions, not words, to curb inflationary pressures.

We could learn a thing or two from the prudent monetary moves Chinese authorities have made recently.
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