Anchoring Inflationary Expectations in PRC
Publication | February 2010
- Inflationary expectations are growing in spite of existing overcapacity and negative or very low price indexes, due to the unprecedented monetary stimulus in 2009, the multiple goals of monetary policy, and the risk of imported inflation.
- Inflationary expectations can be rational or irrational, but they will ultimately create inflation if not managed properly. International experience suggests that the best way to control inflationary expectations is to anchor them. This could be achieved by targeting the exchange rate, monetary aggregates or the inflation rate. Among the three options, international experience suggests that inflation targeting appears to be the most effective mechanism.
- Central bank credibility is indispensable to keep inflationary expectations well-anchored. Central bank autonomy, transparency and fiscal discipline are prerequisites for such credibility.
- In this context, it is recommended that in the short term, the People's Bank of China (PBOC, the central bank) should announce achievable targets for the growth of credit and money supply in 2010, and reinforce coordination between monetary and fiscal policies. In the medium-tolonger term, an explicit low inflation objective would be an appropriate nominal anchor for PRC. Strengthening transparency, communication and institutional capacity are also needed.