(China Daily)
Updated: 2007-12-22 11:07

The sixth round of interest rate hikes this year, effective on Friday, had been expected since inflation hit an 11-year high of 6.9 percent in November.

To manage growing inflationary pressures, the Chinese authorities have to take more action to demonstrate their resolution to rein in price gains.

However, what distinguishes the latest hikes from previous ones is the fine-tuned message that the central bank tried to signal via the asymmetric changes to various interest rates.

The People's Bank of China not only increased long-term rates by smaller amounts than shorter-term rates but also increased deposit rates by a larger margin than lending rates.

For bank deposit rates, while the benchmark one-year rate was increased by 27 basis points, the three-month rate has been raised by a more aggressive 45 basis points, and the five-year rate by a mere 9 basis points. For lending rates, while the benchmark one-year rate was raised 18 basis points, one to five year rates were increased by only 9 basis points and the rate for loans over five years remained unchanged.

Such a differential adjustment makes it clear that the central bank is less worried about inflationary pressure in the long term than price gains in the near future.

A recent survey by the central bank found that nearly seven out of 10 respondents expected that consumer prices would continue to rise. It is urgent for the central bank to clarify its judgment on the price trend to calm the public.

Though economic growth remains very fast this year, may be too fast, policymakers are fully aware of the necessity to be cautious about the economic outlook, especially in the light of looming signs of global economic slowdown.

If significant weakening in external demand drags down net exports and export-led investment, domestic firms could face hard times in coming years. Less aggressive hikes in the lending rates, longer-term ones in particular, will be essential to helping tide them over. To cope with the imminent inflationary pressure, a larger rise in the deposit interest rate is long overdue.

The consumer price index has hovered above 6 percent year-on-year for four months, driving consumer inflation to 4.6 percent for the first 11 months of the year. The latter still overshot the one-year deposit interest rate even after the rise of 27 basis points on Friday.

But through such gradual structural adjustment, the tool of interest rates can be used more effectively and efficiently to defend savers' buying power while avoiding affecting business too much.