PBOC Still Has Policy Room With Mild Inflation, Official Says

China’s tame consumer inflation has created policy space for the People’s Bank of China, an official at the central bank said as she reaffirmed its desire to balance economic growth with keeping prices stable.

“China has implemented a normal monetary policy since the Covid pandemic started and refrained from overstimulating,” Ruan Jianhong, PBOC spokeswoman and head of the statistics and analysis department, said at a forum in Beijing on Friday. “Currently, the rise in consumer prices is mild, providing good conditions for monetary policy adjustment.”

While surging pork prices have pushed consumer inflation to two-year highs, the relatively subdued rise in comparison with other major economies — partly a result of Covid Zero-related lockdown threats discouraging spending — gives policy makers some room to take action as needed. Consumer prices rose 2.7% in July from a year earlier, and that is forecast to have sped up only slightly in August – to 2.8%.

The central bank has taken a restrained approach to stimulus this year, but that’s being tested as Covid outbreaks and curbs and a property crisis darken the economic outlook. Economists now expect gross domestic product to rise just 3.5% this year, far below a government target unveiled in the spring of around 5.5%.

The central bank last month cut policy interest rates in a surprise move, especially given how officials had warned of inflation risks earlier this year. Gloomy economic data, though, has led markets and state media to increase their expectations for further actions, including a possible cut to the reserve requirement ratio that would reduce how much cash lenders have to keep in reserve, thus lowering their funding costs and facilitating loan growth.

At the Beijing event, Ruan reaffirmed prior PBOC commitments that the central bank will keep liquidity reasonably ample and maintain stable and reasonable growth of money supply and credit, while at the same time avoiding over-issuing money.

She also said the PBOC will closely monitor the domestic and overseas inflation situation and keep prices basically stable. The central bank also wants to ensure bank funding costs are steady and corporate financing costs are lower.

The central bank will make the yuan more flexible, she said, adding that it would let the yuan exchange rate play its role as stabilizer of the economy and China’s international balance of payments.

Source: Bloomberg