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China raises banks’ reserve ratio again

China’s central bank increased the amount of money that lenders must keep on reserve for the third time.

Written by Reuters | Beijing |
December 11, 2010 2:47:26 am

China’s central bank on Friday increased the amount of money that lenders must keep on reserve for the third time in one month,a move to mop up excess cash in the economy and rein in inflation. But the decision to raise banks’ required reserves rather than interest rates means that officials have opted for a milder form of monetary tightening for the time being,suggesting that they believe price pressures are still well within their ability to control.

The 50 basis point increase,which takes effect on Dec 20,lifts required reserve ratios to 19 percent for the country’s biggest banks,a record high.

“We expected the RRR rise this time,and I think it is perfectly timed to help manage excessive liquidity,” said Lu Zhengwei,chief economist at Industrial Bank in Shanghai.

“There is still much scope for the central bank to raise reserve ratios next year. We expect several increases in the first quarter of next year and the ratio could reach as high as 23 percent in 2011,” he added.

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