The PBoC has raised RRR again by 50 bps to 21.5% This is the six time that rates have been increased; however, inflation is still at 5.55%, a rate higher than desired by the central bank. Increasing reserve requirement should reduce excess liquidity. The new rate will take effect on June 20th.
The reaction has been mixed given other news in the markets; nevertheless, we expect that this will have a negative effect on commodity markets. Managing a growth slowdown is very risky. Upside risk is a different story. Who cares if you have excess growth as long as the direction is right. The traditional view is that the economy has to be slowed since inflation is high, but what if inflation is caused by structural issues? If this is a price shock to food and energy and the constraints on trade, then increasing the RRR is not going to be effective.
The reaction has been mixed given other news in the markets; nevertheless, we expect that this will have a negative effect on commodity markets. Managing a growth slowdown is very risky. Upside risk is a different story. Who cares if you have excess growth as long as the direction is right. The traditional view is that the economy has to be slowed since inflation is high, but what if inflation is caused by structural issues? If this is a price shock to food and energy and the constraints on trade, then increasing the RRR is not going to be effective.
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