Mendoza School of Business

Can China Tame Its Inflation Dragon?

Published: February 9, 2011 / Author: Charles Wallace

China is raising interest rates for the third time since October in an effort to quell inflation at home. But the signs are growing that it may not be able to keep the problem under control.

“The tightening of monetary policy is way under what they need to do,” says Jeffrey Bergstrand, a professor of finance at the University of Notre Dame. “Once you get to these high inflation rates, they are at risk of moving to hyperinflation, and that always leads to some kind of a clampdown in the future and a bubble burst in terms of demand.”

In an unusual move, the Bank of China used the last day of the Chinese New Year’s holiday to boost its one-year lending rate by a quarter of a point to 6.06%, and it raised the one-year deposit rate by a quarter point to 3%.

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