China continues to face strong inflationary headwinds that will require further action from policymakers, a senior Chinese central bank official has warned.
Strong stimulus-fuelled credit growth coupled with rising commodity prices meant that controlling inflation had now become the government’s number one priority this year, said Zhang Tao, director-general of the International Department at the People’s Bank of China (PBoC).
He told delegates at the EBRD’s annual meeting in Astana that policymakers would have to normalize policy back to 10-year average levels.
“We are currently facing great pressure on inflation,” he said. “While paying attention to providing sufficient credit to non-financial services, we also need to pay attention to the pace and scale of lending ... and to inflation expectations.
“We see the dangers. The economy is not yet overheating, but our task is to prevent the economy from moving to that stage.”
He said that recent tightening efforts by the central bank were an attempt to “get monetary policy back to normal, back to 10-year averages.”
He also attempted to reassure that the central bank would not over-tighten, a scenario which could prompt a hard landing for not just the Chinese, but the global economy as a whole.
“We don’t want to go too far from left to right. The purpose is to get the economy to grow, but in a much more balanced and sustainable way.”
The PBoC, headed by Zhou Xiaochuan, has hiked interest rates four times since last October, most recently a 25 basis-point hike on April 6 that took the one-year lending rate to 6.31%. From 1996 until 2010, China’s average one-year lending rate was 6.49%.
It has raised the reserve requirement ratio (RRR) for large banks a number of times to a record 21%, and has also set a lower 7% annual GDP growth target in its latest five-year plan, which was unveiled in March. Chinese GDP grew at an annual rate of 9.7% during the first quarter of 2011.
However, despite the fact that CPI inflation fell slightly on a year-on-year basis to 5.3% in April, Zhang acknowledged that “inflation continued to grow on a month-on-month and quarter-on-quarter basis”.
Asked by Emerging Markets to give a forecast for interest rates or RRR for the remainder of the year, Zhang was reluctant to suggest precise numbers.
He said that the 10-year average target did not apply solely to interest rates, but to the policy package in general. “We have to design policy vis-à-vis what’s going on at the moment,” he said.
But he suggested that it was too soon to gauge the full effectiveness of policy moves to date. “I think that these measures have been taken in a considered way, and there is a time lag,” he said. “We have to wait for a moment before we can see if the policy impact has had the right effect.”
Most analysts expect one more rate rise and at least one more reserve requirement hike before the end of the year.