China inflation makes it harder for PBOC to cut interest rates US Fed

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.

The producer price index rose by 8.3% in March, slower than the 8.8% increase in February and the lowest since April 2021, according to Wind data. Coal and petroleum products contributed some of the largest gains.

Within the consumer price index, the largest increase was in transportation fuel, up by 24.1% year-on-year in March. The global price of oil has surged since the Russia-Ukraine war began in late February.

China’s consumer price index rose by 1.5% in March, up from 0.9% in February and the fastest since consumer prices rose by the same pace in December, Wind data showed. A sharp, 41.4% year-on-year decline in pork prices continued to drag down food inflation. Vegetable prices rose by 17.2%.

“China’s inflation dynamics…