Monday, 18 April 2011

China tightens monetary policy amid rising global inflation

China has raised its bank reserve ratio requirement again.

On Sunday, the People's Bank of China said that it would raise the reserve ratio requirement by 50 basis points to 20.5 percent effective from 21 April. This will be the fourth such move this year and comes less than two weeks after an interest-rate hike.

The rise in the reserve ratio requirement also comes in the wake of a report last week that showed that China's inflation rate accelerated to 5.4 percent in March, the highest in almost three years.

China is no longer alone among the world's biggest economies in tightening monetary policy. On 7 April, the European Central Bank had raised interest rates by 25 basis points to 1.25 percent, its first rate hike since 2008.

The euro area last week also reported an acceleration in inflation. The inflation rate in the euro area rose to 2.7 percent in March from 2.4 percent in February. This was the highest inflation rate since October 2008.

Incidentally, the United States reported the same inflation rate of 2.7 percent for March. This was a sharp jump from the 2.1 percent inflation rate reported for February.

However, unlike the ECB, the Federal Reserve focuses on consumer prices excluding food and energy, and these were up only 1.2 percent in the 12 months to March. The low rate of inflation according to this measure suggests that the Fed is likely to lag the other major central banks in tightening monetary policy.

Among the major economies that released inflation data last week, the United Kingdom proved to be an exception by reporting lower inflation for March. A report last week showed that the UK inflation rate fell to 4.0 percent last month from 4.4 percent in February.

Nevertheless, the March rate was still twice as high as the Bank of England's inflation target of 2.0 percent, suggesting that the central bank is still likely to raise interest rates later this year.

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