BEIJING - China sees little need for an imminent increase in interest rates, standing apart from Asian counterparts that are raising borrowing costs as the region shrug offs risks from advanced economies.
People's Bank of China officials said "that with a benign inflation outlook there was less need for higher nominal interest rates at this point," the International Monetary Fund said in a statement yesterday after annual consultations with the Chinese government.
"Also, they were concerned that higher interest rates could risk fuelling capital inflows."
China views the yuan as "much closer to equilibrium" now than any time before, the Washington-based lender said. By contrast, IMF staff concluded the currency is "substantially" undervalued.
China has left interest rates unchanged since December 2008, even as countries from Malaysia to Taiwan, South Korea and India lifted them. Real interest rates are close to zero and are creating "perverse incentives" within China, Mr Nigel Chalk, the IMF's mission chief to the country, told reporters yesterday. Over time, "real interest rates will have to rise in combination with a number of other policies" such as financial development and an appreciation of the currency, he said.
President Hu Jintao and Premier Wen Jiabao pledged last week to maintain policy stability in the second half of 2010 after measures to rein in property prices, inflation and bank lending slowed growth to 10.3 per cent from 11.9 per cent in the January to March quarter. BLOOMBERG
But US may soon bite the bullet
WASHINGTON - A subtle but significant shift appears to be occurring within the United States Federal Reserve over the course of monetary policy amid increasing signs that the economic recovery is weakening.
Yesterday, James Bullard, the president of the Federal Reserve Bank of St Louis, warned that the Fed's current policies were putting the American economy at risk of becoming "enmeshed in a Japanese-style deflationary outcome within the next several years".
The warning by Mr Bullard, a member of the Fed committee that determines interest rates, comes days after Fed chairman Ben Bernanke said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so.
With inflation now very low, about half of the Fed's unofficial target of 2 per cent, and with the European debt crisis having roiled the markets, even inflation hawks like Mr Bullard have gotten worried that growth has slowed so much that the economy is at risk of a dangerous cycle of falling prices and wages.
Mr Bullard yesterday said he was not calling right away for the Fed to drop its position that interest rates would remain exceptionally low for "an extended period", or to resume buying long-term Treasury securities to stimulate the economy. But both steps, he said, should be taken if any new "negative shocks" roil the economy.
"Promising to remain at zero for a long time is a double-edged sword. The US is closer to a Japan-style outcome today than at any time in recent history." NYT
