PBOC to focus more on core inflation for monetary policy

Core inflation, a measure of inflation which excludes certain items that experience volatile price movements (notably food and energy) could reflect basic price fluctuations more accurately and reduce the influence of temporary factors on monetary policy, Sheng Songcheng, the head of the financial survey and statistics department of the People's Bank of China, wrote in an article published on the bank's website.

Between January and November, the benchmark CPI, in which prices of fresh food and energy are omitted, was 1.6 percentage points lower on average than the official CPI rate announced by the National Bureau of Statistics, said Sheng.

"The trend of benchmark CPI was basically in line with other emerging markets," he said.

The country is facing inflationary pressures after CPI, a main gauge of inflation, accelerated to a 28-month high of 5.1 percent in November

To soak up excessive liquidity and curb inflation, the central bank has raised the reserve requirement ratio for banks six times and increased interest rates twice this year to support healthy economic development.

In addition, it increased the benchmark lending rate to commercial banks by 52 basis points to 3.85 percent, and raised the rediscount rate (the interest rate at which financial institutions borrow from the central bank) by 45 basis points to 2.25 percent on Sunday, both increases were the first for two years.

Zhou Xiaochuan, China's central bank governor, said in an earlier interview that the country's monetary moves such as raising interest rates are more closely related to the core inflation situation than the official CPI figures.

The governor said that China's core inflation had increased in the second half of this year, but maintained that this was normal considering the effects of the stimulus package adopted during the global financial crisis.

"That means our adjustment of monetary policies need to be as timely as possible," said Zhou.

"The central bank has to maintain a balance between economic growth, employment, consumer prices and international payment.

"Under different economic conditions, the monetary policy priorities would be different," said Sheng, adding that the acceleration of international capital inflows is another barrier hampering the government from raising interest rates.

He said that when the economy is stable, the central bank usually focuses on price stability, but when the economy goes into depression, growth becomes a top priority.

"But generally, the major target of monetary policy is to stabilize prices," he added.

Apart from consumer prices, the fluctuation of asset prices is also an import factor the central bank has to take into account, said Sheng.

"Dramatic changes in asset prices, especially real estate prices, indicate a change of currency value in itself," he said.

Because it is technically difficult to combine asset prices with CPI as a general measure of price fluctuation, the central bank needs to track asset prices carefully, and let the market determine interest rates to better stabilize prices, Sheng said.

source:China Daily