Chinesepod - Interest rate hikes an effective economic tool

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BIZCHINA / Weekly Roundup

Interest rate hikes an effective economic tool

By Yi Xianrong (China Daily)
Updated: 2007-08-24 11:41

According to the central bank stipulation, the commercial banks could
float their bank loan rates within a set limit above or below the
official rates. But the difference between the deposit and the loan rates
has been about 3.5 percentage points for years. Hence, the commercial
banks were blessed with a profit margin which has incurred a lot of
public criticism.

The central bank has responded by narrowing the differences and
encouraging the commercial banks to improve themselves.

Among all the policy tools, an interest hike is the most effective one to
ensure the economy is cooled down gently and safely. The stock market and
the estate market have both be troubled with huge bubbles. The price
bubbles in the two markets are actually a result of the
lower-than-reasonable interest rate.

The bubbles are quite dangerous to the economy, but the means to break
them should be selected with prudence. Administrative intervention might
have an instant effect, but it would also make the economy suffer from
drastic fluctuations

The interest rate hikes can change the market expectations of businesses
and individuals, influence their decision-making, and prick the price
bubbles one by one. Hence the economy is diverted away from overheating
and retains its normal pace.

When interest rates are raised by small percentages it does have a
dramatic influence on the market, but its long-term weight cannot be
neglected.

Currently, the interest rate hike is the best way to achieve a
soft-landing and the central bank is obviously making good use of it.

After this round of interest hikes, the actual interest rate for one-year
deposit will be 1.82 percent under zero if the CPI growth in August
remains the same as in July. The central bank may have to consider more
raises when the time is proper to lift the actual interest rate above
zero.

With the monetary policy being more market-orientated, the central bank
has become more efficient in achieving its policy goals. It could have an
even better performance if its independence was better guaranteed.

(For more biz stories, please visit Industry Updates)

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