China inflation makes it harder for PBOC to cut interest rates US Fed

Transport fuel prices rose by 24.1% in China in March 2022 of a year ago, the largest increase within the country’s consumer price index.

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BEIJING – Sustained inflation in China opens the window for when the People’s Bank of China can cut interest rates and support growth, economists said.

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

“Rising inflation for food and energy prices limits the room for the PBoC to reduce interest rates, despite the rapidly deteriorating economy,” Nomura’s Chief China Chief Ting Lu and a team said in a note Monday.

Lu referred to his team’s report earlier this month that noted how China’s 1-year benchmark bailout rate is only slightly above the rate of increase in consumer prices. This reduces the relative value of Chinese bank deposits.

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

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

“We think April may be the last chance for China to cut tariffs sooner rather than later [the] The Fed’s potential balance sheet is shrinking, “said Bruce Pang, head of macro and strategy research at China Renaissance.

Fed meeting minutes released last week showed how policymakers generally agreed to reduce central bank bond holdings, likely in early May, at about double the rate ahead of the pandemic. US consumer price data are available overnight.

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

He noted how Chinese investors are increasingly expecting the PBOC to trade following comments from senior governments this month.

China will adjust monetary policy “as appropriate” to support growth, said Prime Minister Li Keqiang at a meeting of the State Council, the top governing body, last week.

profit margin squeeze

The producer price index rose 8.3% in March, slower than the 8.8% increase in February and the lowest since April 2021, according to Windgegevens. Coal and petroleum products contributed some of the biggest gains.

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

China’s consumer price index rose 1.5% in March, up 0.9% in February and the fastest since consumer prices rose at the same pace in December, Wind Data showed. A sharp, 41.4% year-on-year decline in pork prices kept food inflation down. Vegetable prices rose by 17.2%.

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

“March inflation was not the only force that brought down Chinese stock markets [on Monday]and the growing real-yield-induced equity sell-off in the U.S. spilled over last Friday, “Liu said.” More Covid concerns in multiple locations outside Shanghai (Guangzhou, Beijing, etc.) also weighed on market sentiment, and investors have their hands full at the moment. “

The U.S. 10-year Treasury yield rose to a three-year high on Friday and continued to rise to 2,793% on Monday, its highest since January 2019. China’s 10-year government bond yield held about 2.8075% on Tuesday, according to Wind Information.

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Citi analysts expect the PBOC, as soon as this month, to be able to cut at least one policy level as the ratio of reserve requirements – a measure of how much cash banks should have on hand. They said the longer omicron wave requires more monetary lighting.

“Inflation will not limit monetary policy for now, in our view,” the analysts said, “but could become more of a source of concern in H2.”

They expect the producer price index to materialize due to last year’s high base – for an annual increase of 5.6% – while the consumer price index is likely to increase slightly – by 2.3% for the year – as food prices continue to rise .

– Chris Hayes of CNBC contributed to this report.


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