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China Data Alert, Feb CPI Close to 4% But The Outlook is Now Uncertain

03-12 17:33 Caijing
An uncertain inflation outlook will make the PBoC’s policy easing more cautious going forward.


·   CPI inflation eased to 3.2% y/y in February, compared with a 4.5% gain previously. Food and dwelling costs rose 6.2% and 2.1%, respectively, compared with 10.5% and 1.9% in the previous month. On a m/m basis, the CPI fell 0.1%.
·    PPI inflation remained flat on a y/y basis, down from January’s 0.7%, mostly due to base effects.
China’s CPI inflation slowed to 19-month low on a decline in food prices after Chinese New Year. But as average CPI inflation for January-February was still close to 4%, the inflation outlook is now uncertain. The combined effect of rebounding world commodity prices and surging oil prices, and the Chinese authorities push to reform fuel and utility pricing mechanisms this year will also add to inflationary pressures. An uncertain inflation outlook will make the PBoC’s policy easing more cautious going forward.

In the near term, we don’t think conditions are right for a cut to banks’ reserve requirement ratio (RRR). Market interest rates have retreated from their early February high, thanks to the PBoC’s RRR cut in mid-February. Also, the central bank has not issued bills for ten straight weeks, further improving market liquidity. Their combined effect drove the 7-day repo rate to below 3% this week. The liquidity easing will likely encourage commercial banks to expand their loan book at a faster pace, with the implied endorsement of the PBoC. We expect that new yuan loans in Q1 will likely reach the expected CNY2.0-2.3trn target set by the Chinese banking regulators, thus further consolidating the economy’s recovery.

As such, we think a RRR cut in early Q2 is likely. However, if capital inflows continue, and the PBoC slows the pace of sterilisation, market liquidity will remain generally relaxed further delaying the need for another cut in the RRR.    




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