Central bank to maintain policy despite inflation fears

View of the headquarters and head office of the People's Bank of China (PBOC), China's central bank, in Beijing, April 3, 2015. [Photo / IC]

BEIJING -- China's central bank said Tuesday it will maintain prudent monetary policy in the second half of this year despite inflation concerns triggered by recent rise in the price of pork, the nation's staple meat.

The People's Bank of China (PBOC) said in an online statement that it will keep the policy orientation and flexibility of multiple monetary tools to ensure that liquidity stays at an appropriate level.

The statement came after rising concerns that policymakers may tighten the monetary policy as inflation has shown signs of warming due to an unexpectedly sharp increase in pork prices.

Pork accounts for 2.9 percent of the consumer price index (CPI). The price has risen more than 20 percent since March. CPI rose only 1.3 percent in the first half.

Dismissing the concerns, the PBOC said the consumer price has steadied at a low level and the outlook is stable.

The central bank said it will continue to improve lending structure, lower financing costs, keep the yuan stable, stabilize financial market expectations and boost the real economy.

Qu Hongbin, chief China economist with the Hong Kong and Shanghai Banking Corporation (HSBC), believes that the impact on inflation from pork prices will be largely offset by falling prices elsewhere.

"Prices of other food items are still quite stable, if not falling, for example, for fresh fruit. This, plus weak property prices and falling fuel prices will largely offset the inflationary impact of pork prices," Qu said.

Li Pumin, secretary-general of the National Development and Reform Commission, a powerful regulator, said the rise was determined by the market and the prices will be back to normal after the period of adjustment.

Qu expects full year CPI inflation at below 1.5 percent, well below the official target of 3 percent and leaving room for further monetary easing.

HSBC expects another rate cut of 25 basis points and reserve ratio cut of 200 basis points during the second half.

The PBOC will hold a meeting for branch presidents at the beginning of August to map out major tasks in the second half of this year.