Interest rates important in China's fight against inflation
2011-03-12 15:22:27
China's Central Bank governor Zhou Xiaochuan said that interest rates, rather than the yuan's exchange rate will be the main tool used to curb inflation, which remained at a high of 4.9 percent in February.
Some analysts believe a stronger currency would make China's imports cheaper, and help reduce inflationary pressures in the world's second-largest economy.
However, Mr Zhou said currency appreciation has a limited role in its fight against inflation because of the country's huge domestic market.
Instead, interest rates will remain a key policy tool to keep prices in check, even though it may cause higher capital inflows.
"After the national economy's recovery from the international financial crisis, there has been some pick-up in inflation. In these circumstances, interest rates are an important tool. Any fiscal policy tool may have negative consequences, such as expanding capital inflows. So interest rates are a crucial policy tool that should be used", said Mr Zhou.
Chinese officials also reiterated that they will continue their policy of introducing fiscal reforms gradually.
"We believe the conditions for the opening of the capital account are getting better. We believe there will be fairly big progress in opening China's capital account in the next five years. As to when the yuan will become fully convertible, for now I have no exact date for you", said Central Bank deputy governor Hu Xiaolian.
To mop up liquidity in the marketplace and to curb inflation, the Central Bank raised the reserve requirement - the amount banks keep in reserve - at banks.
It tightened this requirement by eight times in the last 12 months, as compared to raising interest rates only three times since 2010.
The central bank has hinted at the possibility of more hikes in the future.
The consumer price index, which is a key indicator of inflation, remained unchanged at 4.9 per cent in February.
Amid worries of soaring property and commodity prices, Chinese Premier Wen Jiabao said at the opening of the National People's Congress that the government will cap inflation at 4 per cent this year.
China recorded its largest trade deficit in seven years in February, and economists expect the trend to continue due to slowing oveseas demand and rising commodity prices, which would likely reduce the pressure on China to appreciate the yuan.