PBOC vows to tame inflation expectation

By Dong Zhixin (chinadaily.com.cn)
Updated: 2007-11-14 15:16

Related readings:

 CPI up 6.5% on rising food prices
 CPI rebounds to highest level in 11 years
 Investment banks: October CPI likely to top 6.8%

China's central bank has pledged to tame consumers' inflation expectations as the Consumer Price Index (CPI) rebounded to match the highest level in 11 years.

"We will make full use of the price tools in macro control to keep consumers' inflation expectations at a stable level," Zhou Xiaochuan, governor of the People's Bank of China (PBOC) said in a report published in the Financial News on Wednesday.

Price tools usually refer to interest rate adjustments. High inflation expectations might lead to a rush on consumer goods, thus pushing up prices further.

The CPI, a barometer of inflation, rose 6.5 percent from a year earlier in October, tying the decade high in August, the National Bureau of Statistics said Tuesday.

This doubles the official target of three percent for the whole of 2007, sparking fears of another round of monetary tightening.

"We will coordinate the use of interest rates and exchange rate policies and try to avoid keeping the real interest rate negative for a long time," Zhou was cited as saying.

So far this year, the PBOC has increased interest rates five times, with the latest on September 15, when the one-year savings rate rose to 3.87 percent.

However, the rate of return from bank deposits is still less than the inflation rate, suggesting an erosion of purchasing power for consumers. That sparked an exodus of money from banks to the stock market, whose index has almost doubled so far this year, even after a major correction in the past month.

Core CPI

In spite of the accelerating CPI, the country is not experiencing a full-fledged inflation, said Yao Jingyuan, chief economist of the NBS said, according to the Xinhua News Agency.

"One of the key indicators of full-fledged inflation is a price increase at a comprehensive level. As far as the core CPI is concerned, we are still at a safe zone," he said.

Core CPI excludes food and energy prices, which are prone to seasonal factors.

Surging CPI in October was mainly due to a 17.6 percent hike in food prices. Nonfood items rose only 1.1 percent.

Central bank's Zhou said the top priority of his agency will be preventing the economy from overheating. He vowed to take a more aggressive approach in macro control.

Various tools would be used to enhance the management of liquidity, including open market operations and bank reserve ratio adjustments, he said.

In the past weekend, the central bank announced commercial banks must put 13.5 percent of their deposits in the PBOC as reserves. That marked the highest level ever and the ninth increase this year.

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