MNI: PBOC's Inflation Emphasis Seen Pointing To Limited Easing

The emphasis on inflation and international policy tightening in the People’s Bank of China’s second quarter monetary policy report is a signal that further cuts to key policy rates and banks’ reserve requirement ratios are likely to be limited, analysts said.

In the report released on Wednesday, the PBOC stressed that “structural inflation may rise in the short term, imported inflation persists and prices may see periodic rebounds,” pledging that it will not add unnecessarily to the money supply and will strike a balance between growth and inflation, and between domestic needs and international factors.

Faced with pressure from inflation and yuan depreciation, the PBOC may forego further significant easing and stick to providing previously-announced targeted tools and supportive credit policy at a time when the economic recovery remains fragile, unemployment is high and risks persist in the property sector, said Zhang Jiqiang, analyst at Huatai Securities.

The central bank said rises in consumer prices are likely to break its 3% ceiling in some months this year as consumption recovers following pandemic restrictions, energy prices rise and pork prices enter a bullish phase, but that inflation should be kept to around target for the full year.

NO MENTION OF LEVERAGE

The PBOC said that it had been appropriate to leave its 7-day repo and medium-term lending facility rates unchanged since April given that other major central banks are tightening policy. Its over-CNY1 trillion profit delivered to the government was equivalent to 0.5 percentage points of cuts in reserve requirement ratios, while it has also injected base money and lowered banks’ borrowing costs via means of low-interest structural tools, including relending to small businesses and carbon emission reduction projects.

Chen Jianheng, analyst at China International Capital Corporation, said the central bank would guide down real loan rates to ease financial conditions but would leave policy rates including the MLF rate unchanged.

While the PBOC may mop up short-term liquidity from the market in the third quarter when consumer price inflation is likely to rise above 3% and employment stabilises, any sign of property market weakness may prompt further injections, said Li Chao, chief economist at Zheshang Securities.

Analysts agreed the PBOC had no room to tighten policy, with the report reiterating its determination to “fight for the best result of economic growth”.

They noted that policy banks’ new CNY800 billion lending quota and CNY300 billion bond quota were mentioned twice in the report, in a sign that the official lenders are expected to play a key role in supporting growth.

The report made no mention of leverage ratios or arbitrage, and did not repeat phrases in the previous monetary report saying that “short-term monetary market rates should move around the rates of the PBOC’s OMOs”. These rates have recently diverged. (See MNI: Rush Of Chinese Repo Activity Prompts Concern-Analysts)