Daily Archives: January 16, 2012

Claire Jones

The People’s Bank of China will welcome the news that China’s foreign exchange reserves dipped for the first time in a decade in the final quarter of 2011.

This from the FT’s Simon Rabinovitch in Beijing:

A more serious problem for China has been the need to cancel out the domestic inflationary effect of the reserve accumulation.

The root cause of the growth in currency reserves has been Beijing’s policy of keeping the renminbi in a managed float against the dollar. The semi-pegged currency obliges the Chinese central bank to buy most of the foreign exchange coming into the country, injecting fresh renminbi into the financial system in return.

To prevent that newly created money from pushing prices higher, the People’s Bank of China must constantly engage in what are known as “sterilisation operations”. It issues bills to banks or forces them to set aside a portion of their deposits as required reserves to mop up the excess liquidity.

Not only are these “sterilisation operations” burdensome for the central bank, they are also costly.  Read more

Gavyn Davies logo for central bank liquidity seriesLast week, in the first of a series of blogs on the use of the central bank printing press, I argued that the deliberate decision to increase the monetary base several fold in the US, the eurozone and the UK is an almost unprecedented event in the history of economic policy. Only in Japan, in the early 2000s, has anything like this been seen before.

In this blog, the second in the series, I ask whether this remarkable injection in central bank liquidity is destined to result in rising global inflation in coming years.

 Read more