2. 1 %, and 3. 1 % respectively and month - to - month ( mom ) rose 1. 1 %, – 0. 2 % and 0. 3 % respectively. the cpi in the first half of this year may continue to rise, but current one - year loan rate is only 5. 31 %. if real loan rates fall negative at some point of time, the behavior of economic agents will be distorted. the enterprises will accumulate raw materials because they can make profits simply by borrowing, thus aggravating raw material shortage, pushing price level further up and leading funds to circulate in retailing rather than be invested in manufacturing. therefore, price level is one indicator the central bank must closely monitor when considering interest rate policy. in addition, the central bank must also take into account the issue of forex arbitrage. over the past two years, capital inflows have led to substantial rise in forex position. the amount of capital inflow is directly linked to domestic and foreign interest rate differentials. currently the one - year domestic rmb deposit rate is 1. 98 %, 1. 4 pp higher than the 0. 5625 % one - year domestic usd deposit rate and 0. 92 pp higher than the 1. 06 % one - year us cd rate. in this connection, we must flexibly adjust interest rates on the condition of maintaining both internal and external equilibrium. ii. establish floating benchmark interest rate regime and signal to the public in a timely manner with the approval of the state council, the pbc decided to adopt floating relending rate regime. relendings refers to the loans central bank grants to financial institutions. floating relending rate regime means that the pbc, according to macroeconomic and financial situation, can set and announce the extent by which the relending rates move above benchmark rates within the fluctuation band authorized by the state council. effective on march 25, 2004, the rates on one - year - or - less liquidity relendings rose by 0. 63 pp from existing benchmark level. in order to support agricultural development, floating relending rate regime for rural credit cooperatives will be implemented gradually in three years, and three years later, the rate increments for rccs will be half those for other financial institutions. the adoption of floating relending rate regime is another important step toward interest rate liberalization. it helps not only improve interest rate formation mechanism

sufficient liquidity of financial institutions and falling trend of money market rates during the first quarter of this year, the pbc intensified sterilization operation. in this period, the cumulative amount of central bill issuance reached rmb 435. 2 billion yuan and outstanding amount stood at rmb 615. 45 billion yuan ; base money injection as a result of forex purchase amounted to rmb 291. 6 billion yuan, and open market operation withdrew rmb 281 billion yuan, resulting in a net base money injection of rmb 10. 6 billion yuan and basically offsetting the forex position of base money. ii. use reserve requirement policy in a flexible way to lower the cost of currency withdraw and improve the operation of commercial banks in order to rein in the obviously excessive credit growth, the pbc raised the required reserve ratio by one pp on september 21, 2003. traditional money and banking theories regard required reserve ratio hike as a relatively drastic measure, nevertheless the central bank interpreted it as a mild move. the major reason is that the central bank has to withdraw a large amount of excess liquidity because of fast growth of foreign exchange reserves, to do so, if the central bank only issue cb bills without any other measure, it has to raise the interest rates on cb bills to a very high level given strong economic expansion momentum and commercial banks ’ wide interest rate differentials which is larger than the returns on cb bills, however, high interest rate would have significant implications on the economy. in contrast, the 1 pp rise of required reserve ratio enabled the central bank to reduced at a lower cost the commercial banks ’ excess reserve by around rmb150 billion yuan, accounting for only 6 % of their holdings of treasury bills, financial bonds and cb bills. therefore, the required reserve ratio hike is actually a mild policy measure. moreover, the policy was announced one month in advance, giving sufficient time for financial institutions to manage their liquidity. the pbc also provided timely support to those financial institutions with short - term liquidity difficulties, so as to maintain the overall stable developments of financial operation and money market interest rates. with the approval of the state council, the pbc announced on march 25, 2004 that the required reserve ratio for financial institutions with capital adequacy ratio below a specific level would rise 0. 5 pp to 7. 5 %, while the ratio for other financial institutions remained unchanged. state - owned commercial banks, urban and rural credit cooperatives were exempt from the differentiated required