Inflation in China makes it harder for PBOC to cut US Fed rates

Inflation in China makes it harder for PBOC to cut US Fed rates

Transportation fuel prices in China rose 24.1% in March 2022 from a year ago, the largest increase in the country’s consumer price index.

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BEIJING – Ongoing inflation in China is narrowing the window for when the People’s Bank of China can cut interest rates and support growth, economists say.

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

“Rising food and energy price inflation limits room for the PBoC to cut interest rates despite the rapidly deteriorating economy,” Nomura’s chief Chinese economist Ting Lu and a team said in a note Monday.

Lu referred to his team’s report earlier this month, which noted that China’s 1-year benchmark deposit is only slightly above the pace of consumer price increases. That reduces the relative value of Chinese bank deposits.

At the international level, higher US yields narrow the gap between the benchmark US 10-year Treasury yield and its Chinese counterpart, reducing the relative attractiveness of Chinese bonds. Lowering tariffs in China would further narrow that gap.

According to Reuters, the yield on China’s 10-year government bond fell below that of the US for the first time in 12 years on Monday. Previously, Chinese bond yields tended towards the US at a premium of 100 to 200 basis points

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

The minutes of the Fed meeting released last week showed how policymakers generally agreed to cut central bank bond holdings, likely from May, at about double the pre-date pace. pandemic. US consumer price data comes out overnight.

“Rising inflation, if [it] continues, could further limit China’s room for maneuver for policy maneuvers,” Pang said.

He noted how Chinese investors increasingly expect the PBOC to trade this month following high-level government comments.

China will adjust monetary policy “if necessary” to support growth, Prime Minister Li Keqiang said at a meeting of the State Council, the highest executive body, last week.

Profit margin under pressure

The producer price index rose 8.3% in March, slower than the 8.8% rise in February and the lowest since April 2021, according to data from Wind. Coal and petroleum products contributed some of the largest gains.

Within the consumer price index, the largest increase was seen in transport fuel, up 24.1% year-on-year in March. The global oil price has risen since the war between Russia and Ukraine began in late February.

China’s consumer price index rose 1.5% in March, compared to 0.9% in February, the fastest since consumer prices rose at the same pace in December, data from Wind shows. A sharp 41.4% year-on-year decline in pork prices continued to weigh on food inflation. Vegetable prices rose by 17.2%.

“China’s inflation dynamics implied continued margin pressure on Chinese companies,” said Bruce Liu, the Beijing-based CEO of Esoterica Capital, an asset manager.

March inflation was not the only force dragging down China’s stock markets [on Monday]and Friday’s soaring real-yield-driven US stock sell-off skipped,” said Liu. “More Covid concerns in multiple places outside of Shanghai (Guangzhou, Beijing, etc.) also weighed on market sentiment, and investors have their hands full right now.”

The yield on US 10-year Treasuries climbed to a three-year high on Friday and rose further overnight Monday to 2.793%, the highest point since January 2019. China 10-year Treasury yields held around 2% on Tuesday. 8075% solid, according to Wind Information.

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Citi analysts expect the PBOC this month could at least cut a key rate or reserve requirement ratio — a measure of how much cash banks should have on hand. They said the prolonged ommicron wave requires more monetary easing.

“Inflation, in our view, will not be a drag on monetary policy for the time being,” the analysts said, “but could become more of a concern in the second half.”

They expect the producer price index to moderate from last year’s high base — up 5.6% year-on-year — while the consumer price index is likely to rise slightly — by 2.3% for the year — as food prices remain high.

— Chris Hayes of CNBC contributed to this report.

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