People's Bank of China warns that policy easing may be limited

The People’s Bank of China (PBOC) warned inflation may accelerate as overall demand in the economy picks up, suggesting the scope for further monetary policy easing may be limited.

The PBOC said it would step up support for the economy and maintain sufficient liquidity. The central bank's comments suggest that its focus may shift to preventing economic risks and that the bank may refrain from additional stimulus going forward. Founder Securities Co. noted that the PBOC omitted a pledge that it would actively use the quantitative and structural functions of monetary policy tools that it made at the end of 2022.

Zhang Wei, fixed-income analyst at Founder Securities, said this could be a signal that interest rate and reserve requirement ratio cuts are less likely to happen by the end of this year.

According to researchers from the PBOC, disruptions in the global energy supply and the rapid growth of the money supply in China could be potential risks that will lead to higher inflation. The PBOC also sees an opportunity to improve consumer demand after adjusting stringent Covid controls. In turn, improved consumer demand will increase inflation pressures in the short term.

Because of the impact of COVID-19 controls on consumer and business activity, inflation in China has been relatively low this year.

The PBOC has cut its interest rates twice this year and maintained a relatively loose monetary policy, while other major central banks have tightened it.

Economists at Goldman Sachs Group Inc. said that China is expected to start gradually easing its Covid Zero policy from the second quarter of 2023. According to economists, such policy easing could increase consumption and inflationary pressures. However, overall inflation is likely to remain mild as food prices may start to recover and the labor market is still not strong enough.

Regarding the currency of the PRC, the PBOC stated that the currency has a solid foundation to maintain stability at a reasonable and balanced level. The bank also reaffirmed its position on smoothing out swings in the exchange rate.