China: Further monetary easing in store – UOB

Economist at UOB Group Ho Woei Chen assesses the latest inflation figures in China and potential moves by the PBoC.

Key Takeaways

“Headline CPI inflation edged higher to 1.8% y/y in Dec in line with expectation. This was helped by a low base comparison arising from the decline in food prices in the year-ago period. However, the broader price pressure has continued to be contained in Dec, with core inflation at a modest 0.7% y/y and services inflation at 0.6% y/y.”

“Meanwhile, the deflation trend in the PPI is likely to continue through 1H23. Despite the boost to demand from China’s Covid reopening, the recovery in prices would still be affected by a high base comparison and drag from weaker global demand.”

“For the full year in 2022, headline and core inflation registered 2.0% and 0.9% respectively. We forecast headline inflation to rise to 2.8% this year given the low base comparison and expected recovery in consumption demand which will gain more traction ahead with the borders reopening. For the PPI, we expect it to be flat in 2023 after rising 4.1% y/y in 2022.”

“We see prospects for the 1Y LPR to fall to 3.55% and 5Y LPR to 4.20% by end1Q23. Consensus forecast is factoring in the possibility of a 5-15 bps decline in the 5Y LPR at the upcoming fixing on 20 Jan, which will reduce mortgage costs for homebuyers. Meanwhile, the 1Y LPR may stay unchanged this month given flushed domestic liquidity.”

“The loosening bias for the monetary policy may start to reverse in 2H23 should the economy show stronger rebound and inflation quickens. Our end-4Q23 forecast for the 1Y LPR is at 3.60% to reflect this potential shift.”