China's central bank to raise deposit reserve ratio

The required reserve ratio for financial institutions engaging in deposit business will be raised by 0.5 percentage points from Feb. 25 to 10 percent, the second hike in two straight months, sources with China's central bank said here on Friday.

This moderate increase shows that the People's Bank of China (PBC) had shied away from using drastic moves to absorb liquidity as the country's consumer price index, the measure for inflation, grew by only 2.2 percent in January, down 0.6 percentage points from the previous month, observers said.

The reserve ratio hike, the fifth of its kind since last July, was made to deal with "dynamic currency liquidity changes and to consolidate macro-economic controls", said the central bank in its latest statement.

The statement said that imbalanced international payment generated by mounting trade surplus had resulted increasing currency liquidity and made another reserve ratio hike necessary.

China's central bank lifted deposit reserve ratio by the same margin of 0.5 percentage points on Jan. 15, which was estimated to take 150 billion yuan (18.8 billion U.S. dollars) out of the banking pool.

However, some economists argued that an interest rate hike was inevitable, as reserve ratio adjustments and open market operations had proved ineffective in curbing excess liquidity.

Official data revealed that the newly-added renminbi-denominated loans amounted to 567.6 billion yuan (about 74.7 billion U.S. dollars) in January, basically equivalent to last January but twice as much as last year's monthly average.

"This won't be the last reserve ratio hike of the year. Meanwhile, interest rate rises are far from the best tool to absorb liquidity, " he said.

The central bank reiterated in its Friday statement that it would "adopt a prudent monetary policy, tighten the management of bank liquidity and facilitate the rational growth in monetary credit."