The logic of raising interest rates - on the role of quantitative instruments to hedge the limitations of

 Logic
hike - On the role of quantitative instruments to hedge the limitations of
: Tian Guo Yong (Central University of Finance and the China Banking Research Center)
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prudent monetary policy, what does? In my opinion, there are two aspects to Off important.
first, to make monetary conditions return to normal. It should be recognized that loose monetary policy orientation, the growth of broad money M2 growth rate is extremely high, 2009 reached 30% in 2010 is expected to remain around 19%. Such a high monetary growth and asset bubbles form the hidden dangers of inflation. Therefore, the primary task of prudent monetary policy is to make the M2 growth rate in 2011 dropped to the normal space , according to author's opinion, 15% may be more reasonable level. As is the indirect financing of the leading financial models, to achieve this goal, the incremental bank credit also need to target 7.5 trillion in the previous year based on the modest reduction .
Second, the future price stability oriented monetary policy means that the role of monetary policy tools space will increase. the central bank's macro-control in the early, mainly relied on the statutory deposit reserve ratio, the central the number of votes and other policy tools, intended to strengthen through hedging operations management of liquidity, and interest rates, exchange rates and other price-based instruments use the utmost care.

for First, monetary conditions return to normal, the current parties have basically reached a consensus, but for the second point, the current controversy is not small. such as a view that interest rates can not curb inflation, but also with a view of the effect of interest rates than to raise the reserve ratio. To demonstrate my point of view, the following three most important reasons.
First of all, price-based tools for more announcement effect. to manage inflation expectations, it must play a policy announcement effect. Last year, the central bank raised the reserve ratio several times, but I felt a very intuitive, and I around some of the non-financial industry friends, even my parents have asked me, do not know what his relationship with. And, many people think that raising the deposit reserve ratio for commercial banks, with nothing between them. But after the central bank to raise interest rates, we feel very clear, immediately know: put the money to the bank which would be more valuable. Thus, the effect of slowing inflation expectations immediately. So I think in the management of inflation expectations, interest rate is clearly more effective use of tools.
Second, quantitative tools of hedging is questionable. central bank officials have repeatedly said that for the balance of payments surplus (including the hot money inflows) to form the base money, the central bank had 100% of the hedge, and that after all the hedge, the domestic is not Money problems will exist above normal. In fact, I think this view is questionable. For example, hot money is usually outside the goal is clear, after the inflow into RMB in China will enter the asset market or commodity market. On the surface , the central bank through the operation of quantitative tools can wash away this money on, but it is prone to a problem, then the hedge is part of the money collected by the banking system, and, it may be the so-called cold money. and replaced that part of the RMB hot money, highly active, its purpose is very clear, still have to flow to the asset or commodity markets. Thus, the central bank hedging, although the total amount of the yuan from the stock has not changed, but the structure and function of the stock of money already changed. or, as accelerating the velocity of money, leading to exercise the functions of circulation will increase the money supply, which will undoubtedly boost inflation and asset bubbles. visible, even 100% of the hedge, and its practical effect is still there are limits.
to raise interest rates to make up for this flaw is, as interest rates, will lower expectations of inflation and asset bubbles, so that inflow of overseas speculative purposes based The hot money will be reduced to the territory. Of course, due to the increase of foreign interest rate, there are likely to lead to speculation of some non-arbitrage funds. In this regard, my view is that on the one hand, we must strengthen capital account management, On the other hand, as the cost of fixed-income markets can be opened up into a pool of hot money, such as Zhou Xiaochuan has said, we can not completely let hot money does not make money. into the taking of part of the fixed income market spreads, not on prices and asset prices the formation of too much impact, we have to bear such costs.
Third, price-based tools for quantitative tools to use to open space. to the central bank's two main existing quantitative tools of view, the reserve has reached a record high, the central banks there vote to raise interest rates as expected, leading to disruption of its issuance. In contrast, the role of price-based instruments will be noticeable. relative to the current the rate of inflation, real interest rates remained at a lower level, so the use of future interest rate instruments, there are still more space. Of course, interest rates, too, will naturally use of quantitative tools for the open space. < br> Based on the above analysis, I believe that under the prudent monetary policy-oriented, price-based instruments of monetary policy should continue to increase the use of force, the goal of interest rate policy, at least the nominal deposit interest rates broadly similar to and prices. Meanwhile, in 2011, especially in the first half, could be considered to further increase the flexibility of RMB exchange rate, which will help curb domestic inflation trend.