The Chinese central bank has tightened fiscal policy yet again in order to contain persistent high inflation by raising the reserve ratio requirements for the country’s banks, according to Reuters. On Thursday, the People’s Bank of China announced that it would increase the reserve requirement ratio (RRR) by 50 basis points to a record 21% for leading banks, marking the eighth increase since October. The change is set to take effect on May 18.
The policy change was seen by many as a surprise given slowing industrial growth and inflation, and Xu Biao of China Merchants Bank said the move adjustment could be read as a “part of neutral monetary policy operations.” Biao continued, “The central bank is moving the deposit reserve ratio again to soak up liquidity,” and the RRR increase is more likely to drain inflationary capital inflows, in lieu of a more aggressive move such as an interest rate hike. However, inflation remains above the official 4% target, and analysts expect to see further tightening in the coming months.