Central bank

No rate hikes yet in China

15 June 2021 • 2 mins read

  • The People’s Bank of China (PBoC) is set to continue leaving its key interest rates unchanged this year after Governor Yi said monetary policy must ‘remain stable.’
  • Though rising commodity prices have pushed China’s producer price inflation up to 9%YoY, the PBoC expects consumer price inflation will remain below the government’s 3% target.
  • The central bank is also likely to be encouraged by the slowdown in broad credit growth this year after borrowing in China surged last year during the pandemic.
  • The PBoC’s neutral outlook supports risk assets by allaying fears that interest rates will need to rise to counter inflationary pressures in China.

This month People’s Bank of China Governor Yi said monetary policy must ‘remain stable’ after noting: ‘domestic demand remains steady, which will help keep prices stable overall.’ His comments signal the PBoC will continue to leave its key interest rates unchanged throughout 2021.

Bank of Singapore, Bloomberg

The first chart shows the PBoC modestly lowered its seven-day reverse repo rate and its 1Y Medium-term Lending Facility (MLF) at the start
of the pandemic last year to 2.20% and 2.95%. But this year fears have increased that the PBoC will need to start raising interest rates to counter inflationary pressures. The second chart shows May’s producer price index (PPI) jumped to 9.0%YoY as commodities surged. But Yi expects consumer price index (CPI) inflation to remain under 2%, below the official 3% target for 2021.

Source: Bank of Singapore, Bloomberg

Indeed, May’s CPI inflation rate was only 1.3%YoY showing consumer price rises remain moderate.

Source: Bank of Singapore, Bloomberg

Credit growth is also slowing this year after borrowing jumped in 2020 during the pandemic. The last chart shows total social financing (TSF)
increased by 11.0%YoY in May versus 13.6%YoY last October. Full year credit growth of 11% in 2021 would match China’s likely real GDP growth
of 8.7% and inflation of 2% this year, keeping China’s debt-to-GDP ‘leverage ratio’ stable.

Thus, tame CPI inflation and slower credit growth is enabling the PBoC to maintain a stable monetary stance. Its neutral outlook supports risk
assets by allaying fears that interest rates will need to rise to counter inflationary pressures.

Author:
Mansoor Mohi-uddin
Chief Economist
Bank of Singapore Wealth Planning
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