Should The Central Bank Raise Interest Rates Or Raise The Required Reserve Ratio?

In June 2011, China's consumer price index (CPI) was as high as 6.4%. inflation Become the primary goal of macro-control at the moment. It is not hard to predict that the orientation of monetary policy will not change in the second half of the year. But should we raise interest rates or raise the required reserve ratio? This question is quite puzzling.

The central bank officials have publicly stated that there is no "upper limit" on the theoretical deposit reserve ratio in theory. However, at present, the legal reserve requirement ratio of commercial banks in major developed countries has basically dropped to 0%, and commercial banks are flexible in determining the level of deposit reserve according to their own circumstances. With the promotion of financial innovation, the central bank's adjustment of the statutory reserve requirement rate has become less and less effective on the supply of money, and the developed countries have basically abandoned this policy tool.

Compared with the international trend, it is debatable to normalize the deposit reserve ratio. The central bank has constantly raised the required reserve ratio, which is aimed at hedging the increasing foreign exchange reserves and putting too much money into the underlying currencies, so as to maintain the basic stability of the RMB exchange rate. But for commercial banks, it means that the availability of credit resources will be reduced.

The central bank has raised the deposit reserve rate too much, which has the following negative effects on the macro-economy. First, the central bank pays huge interest rates. Second, it is unfair competition between large state-owned enterprises and "tight money" for small and medium-sized private enterprises. Third, the real interest rate in the long run is negative, in essence, "residents". subsidy Commercial banks subsidize state-owned enterprises.

The central bank keeps raising the reserve ratio, raising doubts about raising interest rates, fuelling speculation and asset bubbles. The reason for not raising interest rates is said to prevent international hot money inflow. In fact, in the case of strict capital controls, hot money generally does not risk pursuing a 2~3 percentage point spread.

Therefore, I believe that the next step in monetary policy adjustment should be more concerned with reality. interest rate Change and adjust the reserve ratio that has been corrected too early.