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Friday 20 February 2009
More mainland rate cuts risky, warns central bank official
Cutting mainland’s interest rates further would be risky and might not help the economy, the head of the central bank’s research department said on Thursday.
More mainland rate cuts risky, warns central bank official
Reuters in Shanghai 19 February 2009
Cutting mainland’s interest rates further would be risky and might not help the economy, the head of the central bank’s research department said on Thursday.
“If we continue to cut interest rates, a liquidity trap could result. The money would not enter the real economy,” Zhang Jianhua said in a speech to a financial forum.
He also said mainland’s money market rates were already low and that another interest rate cut now would leave the central bank little room for further use of rates as a policy tool if needed.
“Cutting interest rates to near zero is not the best option. Of course there is still room to cut rates, but that option is definitely not the best,” Mr. Zhang said, arguing that restructuring the economy was now more important than cutting interest rates.
Zhang’s speech, which contained a wide-ranging analysis of the country’s economic slowdown, was one of the strongest indications so far that the central bank feels it is near or at the end of its monetary easing cycle.
In the last few weeks the central bank has stepped up its drains of funds from the money market; traders believe it is concerned that liquidity could become too loose, storing up pressure for inflation down the road.
Bank lending surged in January as the government pressed banks to lend. But much of the new lending was in the form of short-term bill financing, which analysts said might be expanding companies’ bank deposits and inflating stock market prices rather than increasing long-term investment in the economy.
Although January inflation data showed mainland was close to slipping into consumer price deflation, Mr. Zhang said a drop in prices for any given month would not be very significant. Mainland does not face a serious deflation problem, he said.
He also said some analysts’ forecasts of 6 per cent gross domestic product growth this year were too pessimistic. The government has said it aims for growth of 8 per cent this year, which would be down from last year’s 9 per cent, a seven-year low.
However, Mr. Zhang said he was reluctant to make a specific prediction for this year because there were so many uncertainties in the economic outlook, including whether heavy spending by the government would stimulate a recovery by the non-state sector.
Officials have said they want to boost domestic consumption in mainland to offset weak external demand as the global economy slumps. But Mr. Zhang said increasing domestic consumption would be a slow, complex process that would require factors such as higher incomes and improvement in mainland’s social security system.
Investment in the real estate sector may remain weak for a while, he added. The sector, where prices have been falling since last year after soaring in previous years, is widely seen as one of the danger spots in mainland’s economy.
Mr. Zhang strongly defended the central bank’s policy record. It has been criticised by some economists and investors for harshly tightening monetary policy in the first half of last year, then abruptly switching to equally drastic easing in the second half.
Central banks around the world were not aware of the seriousness of the global economic slump until well into last year, Mr. Zhang said.
“We all thought the same in May last year, that the crisis was not so serious. Only after the collapse of Lehman Brothers did global central banks have a consensus about the nature of the crisis,” he said.
He also argued that the tightening of policy early last year was needed to control inflation and that it curbed excess investment in the economy. If the central bank had not tightened then, “the situation would be more serious now”, he said.
1 comment:
More mainland rate cuts risky, warns central bank official
Reuters in Shanghai
19 February 2009
Cutting mainland’s interest rates further would be risky and might not help the economy, the head of the central bank’s research department said on Thursday.
“If we continue to cut interest rates, a liquidity trap could result. The money would not enter the real economy,” Zhang Jianhua said in a speech to a financial forum.
He also said mainland’s money market rates were already low and that another interest rate cut now would leave the central bank little room for further use of rates as a policy tool if needed.
“Cutting interest rates to near zero is not the best option. Of course there is still room to cut rates, but that option is definitely not the best,” Mr. Zhang said, arguing that restructuring the economy was now more important than cutting interest rates.
Zhang’s speech, which contained a wide-ranging analysis of the country’s economic slowdown, was one of the strongest indications so far that the central bank feels it is near or at the end of its monetary easing cycle.
In the last few weeks the central bank has stepped up its drains of funds from the money market; traders believe it is concerned that liquidity could become too loose, storing up pressure for inflation down the road.
Bank lending surged in January as the government pressed banks to lend. But much of the new lending was in the form of short-term bill financing, which analysts said might be expanding companies’ bank deposits and inflating stock market prices rather than increasing long-term investment in the economy.
Although January inflation data showed mainland was close to slipping into consumer price deflation, Mr. Zhang said a drop in prices for any given month would not be very significant. Mainland does not face a serious deflation problem, he said.
He also said some analysts’ forecasts of 6 per cent gross domestic product growth this year were too pessimistic. The government has said it aims for growth of 8 per cent this year, which would be down from last year’s 9 per cent, a seven-year low.
However, Mr. Zhang said he was reluctant to make a specific prediction for this year because there were so many uncertainties in the economic outlook, including whether heavy spending by the government would stimulate a recovery by the non-state sector.
Officials have said they want to boost domestic consumption in mainland to offset weak external demand as the global economy slumps. But Mr. Zhang said increasing domestic consumption would be a slow, complex process that would require factors such as higher incomes and improvement in mainland’s social security system.
Investment in the real estate sector may remain weak for a while, he added. The sector, where prices have been falling since last year after soaring in previous years, is widely seen as one of the danger spots in mainland’s economy.
Mr. Zhang strongly defended the central bank’s policy record. It has been criticised by some economists and investors for harshly tightening monetary policy in the first half of last year, then abruptly switching to equally drastic easing in the second half.
Central banks around the world were not aware of the seriousness of the global economic slump until well into last year, Mr. Zhang said.
“We all thought the same in May last year, that the crisis was not so serious. Only after the collapse of Lehman Brothers did global central banks have a consensus about the nature of the crisis,” he said.
He also argued that the tightening of policy early last year was needed to control inflation and that it curbed excess investment in the economy. If the central bank had not tightened then, “the situation would be more serious now”, he said.
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