Central bank chief: Exchange rate not main tool to curb inflation

15:04, March 11, 2011      

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Although exchange rate policy can affect the general price level, it should not be the main tool for curbing inflation in China, which has such a large-scale domestic economy, central bank governor Zhou Xiaochuan said on March 11.

Central bank governor Zhou Xiaochuan takes questions from the media on whether China would continue to appreciate the yuan to battle high inflation on the sidelines of the ongoing NPC session in Beijing, March 11, 2011.

Zhou made the comment when answering a question on whether China would continue to appreciate the yuan to fight against inflation.

The interest rate policy will definitely be an important tool to tame inflation in the process of economic recovery, although higher interest rates might lead to capital inflows, Zhou said at a press conference on the sidelines of China's ongoing parliamentary session this morning.

However, China's capital account is not entirely open, and the government still has some measures to manage capital inflows, Zhou said. The monetary policy has to be weighted before it is used even in some countries that do not have controls on the capital account. Therefore, interest policy will still remain as an important tool to curb inflation right now.

China has a large economy and population. Therefore, the effect of exchange adjustments on price cannot be avoided. However, such an effect on a small and open economy might be relatively smaller. Therefore, China will not rely much on exchange rate policy versus other measures of curbing inflation.

China will continue to push forward yuan exchange rate reform in a self-initiated, controllable and gradual manner and enhance the flexibility of the exchange rate, Zhou said.

Everyone concerned about global economics may have noticed that the global economic recovery has become unbalanced after the financial crisis, Zhou said, which means the recovery speed in developed countries is slow and still faces some troubles.

However, the recovery of emerging market countries is developing strongly with a relatively higher rate of increase. Hence, the difference between the inflation rates of developed countries and emerging market countries is pretty obvious, Zhou said. Also, people may have noticed that the consumer price index (CPI) in most emerging market countries is higher than in China.

In addition, Zhou said, China has a plurality of trade partners currently, which includes both developed countries and emerging market countries, especially Asian countries.

By Wang Hanlu, People's Daily Online

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