People's Bank of China Takes With One Hand, Gives With The Other? / Kasriel

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The People's Bank of China (PBOC) announced today that it was raising the required reserve ratio on its constituent banks by 0.5 percentage points to 11.5%. This would be the eighth increase in the required reserve ratio since June 2006 when the ratio was 7.5%. You would think that with the PBOC mandating that banks now hold more reserves, the cost of reserve credit would be moving up. Think again. Chart 1 shows that the Chinese overnight interbank interest rate, the equivalent of the U.S. fed funds rate, stood at 1.57% in March (latest data that I have available) - 12 basis points lower than where it was in June 2006, before the required reserve ratio started its ascent....
If the demand for something has gone up, in this case, the dictated demand for bank reserves, how can the price of that something, the overnight interest rate on bank reserves, stay almost the same? .....

And U.S. banks can only look on in envy at Chinese banks that can fund themselves overnight at 1.6% and lend for one-year at 6.57%. In sum, it does not look as though the steps taken today by the PBOC on reserve requirements and interest rates will do much to slow down bank credit / money supply growth and, thus, consumer price and asset price inflation unless these steps are taken in conjunction with a sharp slowdown in the PBOC's provision of bank reserves.......