China's central bank warns of inflation risks as CPI climbs

THE People's Bank of China (PBOC) said it will safeguard the economy against inflation threats, pledging to avoid massive stimulus and excessive money printing to spur growth.

The central bank will both support economic growth and ensure stable prices, the PBOC said in its quarterly monetary policy report released on Wednesday (Aug 10). At the same time, it will provide stronger and higher-quality support to the real economy, it said.

"Structural inflation pressure may increase in the short term, and the pressure of imported inflation remains," the PBOC said. "We can't lower our guards easily."

The PBOC's warnings came on the same day official data showed inflation accelerated in July to 2.7 per cent, the highest level in 2 years, largely driven by food prices as pork costs surged. Weak consumer demand kept overall price pressures in check, though.

The central bank said consumer inflation will likely exceed 3 per cent in some months during the second half of the year. However, China will likely achieve the target of keeping full-year inflation around 3 per cent in 2022, thanks to measures taken to ensure grain and energy supply as well as a prudent monetary policy, it said.

"Structural inflation will unlikely influence the direction of monetary policy, but may further restrict the room for easing," said Gao Ruidong, chief economist at Everbright Securities, in a note Thursday.

The report's focus on near-term inflationary pressures and how it's implementing policy indicates the PBOC is likely to continue with its stance towards low-profile, accommodative monetary policy, Goldman Sachs Group economists including Maggie Wei wrote in a note late Wednesday.

A pledge in the report to "not over-issue money" implies the PBOC thinks the current supply of liquidity is already sufficient, meaning it may not reduce the amount of cash banks must keep in reserve or cut interest rates for the rest of this year, Qin Tai, chief macro analyst at Shenwan Hongyuan Group, said in a report.

The Goldman economists also said they continued to expect "unchanged overall reserve requirement ratio and policy interest rates", adding that the central bank will instead favour targeted tools such as its relending programmes, or rely on policy banks to boost lending and support credit growth.

The PBOC has signalled in the past it will focus on boosting credit instead of cutting interest rates to support the economic recovery, while top leaders have raised concerns about potential inflation spillovers as prices soar in other major economies.

The central bank said Wednesday factors that have contained inflation over the past 2 decades, such as globalisation, have reversed, and the recovery in domestic consumption may accelerate the transmission of factory inflation to consumers. The pickup of pork prices and China's reliance on imported gas and oil also created challenges, it said.

Soaring inflation in the US and Europe is a lesson for China's macroeconomic policies, the PBOC said. Maintaining a stable currency is the primary responsibility of a central bank, and keeping stable inflation is key, it said.

Acknowledging the tightening in monetary policy elsewhere, the PBOC said its unchanged policy interest rates in the second quarter have "helped maintain internal and external balance against the backdrop of interest rate hikes by major global central banks". BLOOMBERG

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