Zhou Xiaochuan: Further rate increase unnecessary
Zhou Xiaochuan, governor of the People's Bank of
China, clearly indicated during a speech on Friday (November 4) that there is no need for
China to further increase the interest rate at present.
The speech was made at a key point when people were hypothesizing what step
China would take in light of rate increases earlier in the week by the US and
Hong Kong. Since
China's existing interest rate is relatively low, whether
China will raise the interest rate is now a focus point.
Zhou Xiaochuan emphasized the relation between the interest rate and the price index. Since
China's price index in 2003 and 2004 went up, the central bank raised its interest rate accordingly. Nevertheless,
China's current price index is relatively low, especially so this past summer. Thus there is no need for
China to increase its interest rate, the governor argued.
However, he did concede that the low interest rate means
China's capital is inexpensive. This might lead to a low utility rate of capital and an underestimation of capital risks.
He explained that the adjustment of
China's deposit interest rate and lending rate are separate issues. The current upper limit of the lending rate has been enlarged, and bank loans can be priced through the interest rate policies. The deposit rate is only a little bit higher than the price index, which is a function of policies aimed at stimulating
consumption. In other words, the low interest rate will increase the proportion of
consumption in national economy.
SteelOrbis Shanghai