China: Prudent and neutral monetary policy to be maintained - Scotiabank

Tuuli McCully, Research Analyst at Scotiabank points out that China’s monetary conditions are set to remain “prudent and neutral” over the coming months, according to the People’s Bank of China (PBoC).

Key Quotes

“The country’s monetary policy has become more market-based in recent years and the central bank is now using the 7-day reverse repo rate as its de-facto policy rate to signal monetary policy intentions (yet officially the one-year loan and deposit rates are still the formal benchmark interest rates and are determined by China’s State Council). We expect monetary policy to be tightened cautiously in the latter part of the forecast horizon, yet conditions are set to remain relatively loose overall against the backdrop of slowing economic growth momentum.” 

“Price pressures remain well contained in China with headline inflation currently hovering below 2% y/y (chart 4). We expect only gradual strengthening in inflationary pressures over the coming quarters with the inflation rate reaching 2½% y/y by the end of 2019. As part of China’s financial market liberalization efforts over the medium-term, the PBoC will likely move away from money growth targets toward inflation-targeting. Such transition will eventually improve monetary policy transparency and credibility, which are important prerequisites for successful internalization of the Chinese renminbi (CNY). In the meantime, we expect Chinese policymakers to increase exchange rate flexibility slightly. This is likely to happen through a wider CNY trading band around the PBoC’s reference rate; we believe that the existing ±2% band may be enlarged— potentially to ±3%—soon after the party congress.”