The PBoC pledged to safeguard the economy from inflation risks in its quarterly monetary policy report last Wednesday, after it projected CPI inflation would exceed 3% in H2. Headline CPI inflation had accelerated to 2.7% in July on the back of higher food prices. The CPI for pork jumped 20.2% y/y.
The rate cuts earlier today were, therefore, seen as a ‘surprise’: the interest rate on one-year medium-term lending facility (MLF) loans dropped 10 bps to 2.75%. Borrowing costs for the 7-day reverse repo were lowered by 10 bps to 2.0%.
These small rate cuts suggest that the PBoC understands the need for a looser monetary policy, to put a floor under the slide in property prices. But if the Central Bank remains constrained by food inflation over the next couple of months, the downturn could worsen materially.
Higher inflation prints on the headline measure certainly increase the risks of a PBoC mistake: despite today’s rate cuts, the authorities remains behind the curve. The 10-year Chinese government bond yield slid 8 bps to 2.66%, the lowest since May 22nd, 2020, showing just how far the PBoC may eventually have to cut its policy rates.
Residential prices in the secondary market declined for a twelfth straight month, down another 0.21% m/m in July (-3.01% y/y). The property bust is now bleeding through to the real economy: deflation in house prices threatens to spill over into consumer goods and services. Core CPI inflation eased from 1.0% to 0.8% last month, the lowest since April 2021.
