People's Bank of China raises reserve requirements to continue inflation fight

03/18/2011 12:48 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It will take more than a tsunami and the potential for a nuclear disaster in Japan to divert the People’s Bank of China from its efforts to tame inflation.

Today, March 18, China’s central bank raised reserve requirements for the country’s biggest banks by another 0.5 percentage points to 20%, effective March 25. This is the third increase in the reserve requirement in 2011 and will require banks to put an additional $53 billion into reserves. (Money that goes into reserves is money that can’t be lent. And that slows the economy and pushes against rising inflation.)

Economists are forecasting that inflation will pick up to a 6% annual rate in March. That would be the fastest increase in prices since July 2008. Inflation at the consumer level was an annual 4.9% in February, but producer prices climbed at a 7.2% annual rate suggesting that higher consumer inflation is in the pipeline. Beijing’s target rate for inflation is 4% for 2011.

An increase from the February 4.9% rate would set up the People’s Bank for another increase in its benchmark interest rate, now at 6.06%. The bank has raised that rate three times since mid-October.

The move by the People’s Bank--following yesterday’s interest rate increase, the eighth in 12 months, by the Reserve Bank of India to 6.75%--argues that central banks in developing economies remain committed to fighting inflation despite the disaster in Japan. If you want to find a positive note in that, it’s this: In their judgment the disaster in Japan won’t knock enough off global GDP in the months ahead to relieve inflationary pressures in their economies.

 

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