Inflation surge restricts China’s monetary policy

Bloomberg

China’s room to ease monetary policy to aid the slowing economy is being limited further by price rises due the ongoing swine fever epidemic, economists said.
Analysts from Nomura International Ltd and Changjiang Securities Co warned that surging consumer inflation has become a major constraint on the People’s Bank of China (PBOC), and the likelihood for major monetary easing in the coming months has declined. That’s despite increasing evidence that economic growth will drop below 6% next year.
“With surging meat prices, continued spill-over effects to other food prices, and the risk of a wage-price spiral, we believe the PBOC may become more reluctant to deliver any high-profile monetary easing in the coming quarters,” Lu Ting, chief China economist at Nomura in Hong Kong, wrote in a note.
Lu said he doesn’t expect any cuts to the interest rate on the medium-term lending facility or to the amount of money banks hold as reserves in the remaining months of 2019, revising a previous estimate that such cuts would take place in the fourth quarter.
With the US Federal Reserve was expected to deliver its third straight interest-rate cut, the monetary policy divergence
between the two largest economies is set to continue. China hasn’t followed a US policy move since March 2018, and hasn’t adjusted its main benchmark rate since 2015.
Consumer inflation may keep rising as the production of meat will continue contracting but demand will pick up due to the upcoming Spring Festival holidays in January.
That will make it harder for the government and central bank to add stimulus to help Chinese factories, who are facing higher tariffs, falling profits and prices.
The Communist Party’s Central Committee is meeting behind closed doors this week, and officials will take into account the range of economic policies available given the long list of challenges besides consumer price inflation: the downdraft from the trade war with the US, factory-price deflation, and a fragile financial system.
The nation’s already high debt levels and inflated property market have made policy makers reluctant to cut benchmark interest rates, though in theory officials have room to respond should the economic slowdown worsen.
Excluding food and energy prices, China’s core inflation is on a downward trajectory this year, indicating tepid domestic demand. However, the overall inflation, not core inflation, is the “most watched” price index for policy makers, because the former is related to people’s lives, according to George Wu, chief economist at Changjiang Securities and also a former official in the PBOC’s monetary policy department.
“Looking forward, macro policies will tilt towards a pro-growth bias. However, monetary policy isn’t the only counter-cyclical measure,” Wu wrote in a note. “Combined use of fiscal and foreign-exchange policies can be expected. Historically in China, price shocks combined with monetary stimulus have been the cause of
a price spiral.”