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Expert's View
Special> Coping With the Global Financial Crisis> Expert's View
UPDATED: October 17, 2009 NO. 42 OCTOBER 22, 2009
Inspirations and Reflections

On October 6, the Australia Reserve Bank increased its policy interest rate by 25 percentage points to 3.25 percent, the first central bank to do so after the outbreak of the financial crisis. Should China follow Australia in raising interest rates or adopt other policies to curb monetary inflation? Dr. Ma Jun, chief economist for Greater China at Deutsche Bank, offered his insights in China Business News. Edited excerpts follow:

The Australian central bank's bold move to raise its interest rate marked the official launch of monetary policy cutbacks by a major economy. As estimated by Deutsche Bank, Australia's interest rate will increase by another 125 percentage points by the end of next year. In the next few months, South Korea will also probably raise its interest rate. By the middle of next year, the European Central Bank may follow suit.

Australia's inspiring action could be a prime example for China to follow.

As a first point, monetary policy should provide enough room for perceptiveness, allowing the country to see the larger picture of what the future may hold. Generally speaking, it takes at least one year for monetary policy changes to take effect on the consumer price index (CPI) and produce substantial results. That is to say, we should not tighten our own policies until inflationary data has reached the economic frontline.

Before Australia raised its interest rates, its CPI growth rate was only 1.5 percent year on year, much lower than the initial target set by the Australian central bank. But, even so, the central bank predicts a CPI potential increase in the future. This foresight is the underlying reason that the central bank changed its monetary policies.

Second, property price data have become an important factor in the directional change of the Australian central bank's monetary policy. The action was considered a response to rising housing credit, which the central bank pointed out in a statement on its website concerning the current interest rate change.

This monetary move will provide a major blueprint for China to follow. Stabilizing property prices should be one of the main goals that the government's adjustment policy aims to achieve.

Property price, especially for housing, is a major predictor of inflationary pressure. But at the same time, the housing price fluctuation will increase risks to banks, the stock market and the financial sector in general. For central banks around the globe, it is necessary to control housing prices and house-related credit growth to maintain stability and ensure continued progress on the road to economic recovery.

Third, Australia's response also suggests that a high GDP growth rate should not be a necessity when making adjustments to monetary policies. According to Deutsche Bank, this year Australia's GDP will increase by only 0.8 percent year on year, and 2 percent next year.

If China adopts a similar constrictive policy after its own GDP increases by 12 percent year on year, the potential for the current continued economic growth will not be sustainable and a wave of inflation will commence.

I think the Chinese central bank should start increasing its own interest rate as soon as the year-on-year GDP growth rate reaches 10 percent and CPI growth hits 1.5 percent.

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