In the U.S., consumers are paying more for everything. In China, the inflation problem is very different

In the U.S., consumers are paying more for everything. In China, the inflation problem is very different

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

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BEIJING — Persistent inflation in China narrows 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 by more than analysts expected, according to data released Monday.

“Rising food and energy price inflation limits the space for the PBoC to cut interest rates, despite the rapidly worsening economy,” Nomura’s chief China economist 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 deposit rate is only slightly above the rate of consumer price increases. That reduces the relative value of Chinese bank deposits.

On an international level, higher U.S. interest rates narrows the gap between the benchmark U.S. 10-year Treasury yield and its Chinese counterpart, reducing the relative attractiveness of Chinese bonds. Cutting rates in China would reduce that gap further.

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

“We think April could be the last chance for China to have a rate cut in the near term before [the] Fed’s potential balance sheet shrink,” 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 the central bank’s holdings of bonds, likely starting in May, at about double the rate prior to the pandemic. U.S. consumer price data is due out overnight.

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

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

China will adjust monetary policy “when appropriate” to support growth, Premier Li Keqiang said at a meeting last week of the State Council, the top executive body.

Profit margin squeeze

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Citi analysts expect the PBOC could, as soon as this month, cut at least a policy rate or the reserve requirement ratio — a measure of how much cash banks need to have on hand. They said the prolonged omicron wave requires more monetary easing.

“Inflation won’t constrain monetary policy for now, in our view,” the analysts said, “but could become more a source of concern in H2.”

They expect the producer price index to moderate due to last year’s high base — for a 5.6% annual increase — while the consumer price index will likely rise slightly — rising 2.3% for the year— as food prices remain elevated.

— CNBC’s Chris Hayes contributed to this report.

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