By Yi Xianrong (China Daily)
Updated: 2007-08-24 11:41

According to the central bank stipulation, the commercial banks could float their bank loan rates within a set limit above or below the official rates. But the difference between the deposit and the loan rates has been about 3.5 percentage points for years. Hence, the commercial banks were blessed with a profit margin which has incurred a lot of public criticism.

The central bank has responded by narrowing the differences and encouraging the commercial banks to improve themselves.

Among all the policy tools, an interest hike is the most effective one to ensure the economy is cooled down gently and safely. The stock market and the estate market have both be troubled with huge bubbles. The price bubbles in the two markets are actually a result of the lower-than-reasonable interest rate.

The bubbles are quite dangerous to the economy, but the means to break them should be selected with prudence. Administrative intervention might have an instant effect, but it would also make the economy suffer from drastic fluctuations

The interest rate hikes can change the market expectations of businesses and individuals, influence their decision-making, and prick the price bubbles one by one. Hence the economy is diverted away from overheating and retains its normal pace.

When interest rates are raised by small percentages it does have a dramatic influence on the market, but its long-term weight cannot be neglected.

Currently, the interest rate hike is the best way to achieve a soft-landing and the central bank is obviously making good use of it.

After this round of interest hikes, the actual interest rate for one-year deposit will be 1.82 percent under zero if the CPI growth in August remains the same as in July. The central bank may have to consider more raises when the time is proper to lift the actual interest rate above zero.

With the monetary policy being more market-orientated, the central bank has become more efficient in achieving its policy goals. It could have an even better performance if its independence was better guaranteed.

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