Beijing’s headline consumer price inflation (CPI) growth eased to the lowest point since July and could suggest a reduction in the research requirement ratio (RRR) as it battles tighter interbank liquidity conditions, according to the Royal Bank of Scotland (RBS) and HSBC.
Despite the fact China recorded a lower CPI figure in October compared to the previous month, RBS believes that inflation is still high and that non-food inflation has been on the rise.
As a result, a sharp change in monetary policy is highly unlikely, but the RRR is considered an exception.
“Against this backdrop, the benign inflation development this month should give the People’s Bank of China additional comfort to keep rates on hold amid the global turmoil,” said Cui Li, a Hong Kong-based non-Japan Asian economist at RBS in a report today (November 9). “One exception is the RRR for liquidity management.”
Interbank liquidity conditions have tightened in China in recent months as foreign currency inflows slowed. In response the central bank has injected liquidity on a net basis.
“Such a change in the balance of payment inflows, along with the promises to keep policies more targeted suggests that a cut in the RRR especially that for smaller banks can’t be ruled out in the coming months,” added Li.
October’s CPI rose 5.5 % year-on-year against 6.1% in September as food inflation retreated, in line with market expectations. Seasonally adjusted CPI edged down marginally to 0.25% month-on-month from 0.33% in the previous month, while food CPI stayed almost flat at 0.6%.
The latest inflation figures marks a shift towards the cooling down of demand as growth momentum softens in recent months, since peaking at a pace of 6.5% year-on-year in July.
HSBC has the same outlook at RBS. They said October’s CPI numbers reconfirmed the slowing trend of inflation in China, leaving more room for selective easing in coming months, though not specifying RRR in particular.
“The expected targeted easing of both credit and fiscal policies should support not only SMEs, but also public housing and ongoing infrastructure projects,” said Hongbin Qu, a Hong Kong-based economist at HSBC in a research report today.
“With little risk of a hard-landing for China, Beijing will unlikely engineer a monetary policy u-turn or across-board easing before headline CPI drops below 4% in our view.”