Saturday, February 14, 2009

China Interest Rates - There Is Still Room To Cut Them

China's central bank still has some room to lower interest rates to fight the threat of deflation, vice-governor Yi Gang said on Saturday, February 14, 2009.

The People's Bank of China last cut interest rates on Dec. 22, lowering the benchmark one-year lending rate to 5.31 percent -- a still high cost of borrowing in inflation-adjusted terms considering the sharp downturn in the economy.

"When I say interest rates are at an appropriate level, people interpret it as meaning no more rate cuts. That is not correct," Yi told a forum at Peking University.

The PBOC has cut rates five times since September and reduced bank reserve requirements four times. It has also abolished credit quotas, triggering a surge in bank lending in support of the government's 4 trillion yuan stimulus package.

"Interest rates currently are at a level that can be moved up or down, and I think there is still room to cut them," Yi said.

Consumer price inflation was just 1.0 percent in the year to January, and many economists expect an outright decline in the price level as early as February.

"After figures for February and March come out, our short-term concern will be to fight deflation," Yi said.

China is already experiencing deflation at the factory-gate level: producer prices fell 3.3 percent in the 12 months to January.

But Yi said there was no need to panic over the recent sharp deceleration in consumer inflation, which reflected a high base in 2008. Mechanically, the base effect alone would result in a 1.2 percent drop in the consumer price index this year, Yi said.

He said lower interest rates were a natural part of the "moderately easy" monetary policy that the PBOC adopted last year.

But because the central bank has other monetary tools at its disposal, including open market operations, the policy of zero interest rates being adopted by some other countries was not the best option for China, Yi said.

He said the central bank was determined not only to fight deflation but also to preserve the purchasing power of the yuan and to keep the currency's exchange rate stable.

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