Thursday, June 29, 2006
Thus, we will see more sterilization through PBOC note issuance and more adjustments in reserve requirements and cut-backs on excess reserve rates. If M2 continues to grow above say 18% in the next month or two, we might see 25 basis points increase in PBOC rates, but probably not much more.
The real reason I think that the PBC isn't raising interest rates is that that doesn't cool down the economy as well as reserves and light administrative controls. The rise in interest rates in 10/2004 actually seem to cause M2 to accelerate.
My pet theory is that because the rates that banks lend out is set by the market whereas the rates that the banks pay out is fixed (and very low) that raising interest rates might actually cause banks to lend out more money.