Monday, November 22, 2010

China "ups the ante" in inflation fight

The Peoples Bank of China has announced a further increase of 50bps in the Reserve Requirments Ratio (RRR). This increase, the second in two weeks, takes the average RRR to 17.5%. This move signals the Bank is taking inflation risks seriously - which is to be applauded. As we have said on many occasions, the most serious risk to emerging market prosperity is any lack of commitment to tackle inflation head-on. Given our positive view on commodities and the fact that commodities make up a greater share of CPI baskets in emerging markets, inflation represents a clear and present danger. We expect further RRR increases in the months ahead and another increase in benchmark interest rates before the end of the year. This will certainly have an impact on growth in China, but that's not necessarily a bad thing. We'd rather see lower, stable growth rather than something stronger but ultimately unsustainable.