Liberalize interest rates further

On Christmas day, China's central bank raised interest rates for the second time in 2010 to check rising consumer prices and the heated real estate market. It would not be surprising to see the central bank lift the rates again in the near future.

The move has left me wondering whether allowing interest rates to play their due role in the economy through liberalization, as opposed to raising them artificially time and again, would be a better way of curbing inflation.

While there has been remarkable progress in the interest rate reform since the mid-1990s, China still has restrictive controls over deposit rates and sets a 10 percent floor on benchmark lending rates. It is not hard to see the challenges our economy now faces because of these controls. The rise of the consumer price index by 5.1 percent in November has left negative real rates for deposits, that is, deposit rates are lower than inflation. This indicates that households' purchasing power is being eroded by the rise in consumer prices.