May 22, 2022

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Inflation in China makes it difficult for the People’s Bank of China (PBOC) to cut interest rates the US Federal Reserve

Inflation in China makes it difficult for the People's Bank of China (PBOC) to cut interest rates the US Federal Reserve

Transportation fuel prices rose 24.1% in China in March 2022 from last year, the largest increase within the country’s CPI.

Vcg | China Optical Group | Getty Images

BEIJING – China’s persistent inflation is narrowing the window for time People’s Bank of China It could lower interest rates and support growth, economists said.

Official measures of producer and consumer prices in China rose in March by more than analysts had expected, according to data released on Monday.

“Rising food and energy price inflation limits the scope for the People’s Bank of China to cut interest rates, despite the rapidly deteriorating economy,” Nomura’s chief China economist Ting Lu and team said in a note on Monday.

Lu referred to his team’s report earlier this month that China’s one-year deposit rate is only slightly higher than the rate of consumer price increases. This reduces the relative value of Chinese bank deposits.

Internationally, higher US interest rates narrow the gap between the US benchmark 10-year treasury bond yield and its Chinese counterpart, reducing the relative attractiveness of Chinese bonds. China’s reduction rates would narrow this gap further.

The yield on Chinese 10-year government bonds fell from that of the United States for the first time in 12 years on Monday, according to Reuters. Previously, Chinese bond yields tended to trade at a premium of 100 to 200 basis points in the US

“We believe that April may be the last chance for China to cut interest rates in the near term by [the] The potential balance sheet for the Fed is shrinking,” said Bruce Pang, head of macro and strategy research at China Renaissance.

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The minutes of the Federal Reserve’s meeting released last week showed how policy makers generally agreed Reducing the central bank’s holdings of bondslikely to start in May, at about double the pre-epidemic rate. US consumer price data Overnight.

“High inflation, if [it] Ongoing, it could limit China’s room for political maneuvering.”

He noted how Chinese investors are increasingly expecting the People’s Bank of China (PBOC) to act following high-level government comments this month.

Premier Li Keqiang said at a meeting last week of the State Council, the top executive body, that China would adjust monetary policy “as appropriate” to support growth.

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Citi analysts expect the People’s Bank of China (PBOC), as soon as this month, to at least lower the policy rate or reserve requirement ratio – a measure of how much cash banks need on hand. They said a prolonged Omicron wave requires more monetary easing.

“Inflation will not constrain monetary policy for now, in our view, but it could become a concern in the second half,” analysts said.

They expect the PPI to moderate due to last year’s high base – versus an annual increase of 5.6% – while the CPI is likely to rise slightly – rising 2.3% for this year – as food prices continue to rise.

CNBC’s Chris Hayes contributed to this report.