Rising Inflationary Pressures In Asia Leave Less Room for PBoC Manoeuvre

• We saw overnight that inflation surprises ‘positively’ in April in China, with CPI inflation accelerating to 2.1% (vs. 1.8% exp.), up from 1.5% the previous month.
• PPI inflation, which investors tend to follow closely as it has historically strongly co-moved with LT bond yields, also came in higher than expected at 8% (vs. 7.8%), down from 8.3% the previous month.
• We saw that inflationary pressures have been rising in Asia / SE Asia since the start of the year, resulting from the global supply chain disruption (partly caused by the severe lockdown policies imposed by the Chinese government) and the Ukraine war shock.
• Asian central banks have adopted a more hawkish stance in recent weeks, with Malaysia central bank (BNM) announcing a 25bps hike earlier this morning, levitating the policy rate to 2% (vs. 1.75% exp.).
• This follows RBI ‘hawkish’ move last week, with India unexpectedly hiking its repo rate by 40bps to 4.40%.
• Even though the sharp contraction in China ‘liquidity’ in 2021 has been pricing in a significant deceleration in PPI inflation this year (see chart), the current environment is likely to maintain inflation rates high and therefore limit the room for PBoC easing cycle.
• Hence, the easing signals sent by China officials may not be enough to support the domestic economy, and the global risk off environment could continue to weigh on China risky assets (i.e. equities) in the ST.

Source: Bloomberg/MNI