(Bloomberg) — Economic policies must react if tumbling oil prices affect core inflation, China’s central bank said in a quarterly report that coincided with a reading of consumer prices showing the slowest pace of gains in five years.
“Monetary policy shouldn’t over-react to oil price fluctuations,” the People’s Bank of China said in its fourth-quarter monetary policy report in Beijing Tuesday. “However, if fundamental changes lead to changes in the trend price of oil, or if oil price moves change inflationary expectations significantly and spread to core inflation, then macro-economic policies must be adjusted accordingly.”
While the PBOC was referring to central banks in general rather than making a statement on its policy outlook, the comments are in line with economists’ commentary today. The consumer price index rose 0.8 percent in January from a year earlier, while factory gate prices extended a 35-month decline.
“It is clear that China is heading into deflation, and the PBOC will do more to ease monetary policy,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, wrote in a note today. The central bank is expected to cut interest rates three times and the required reserve ratio by five times this year, he said.
Oil fell for the first time in four days amid speculation U.S. supply will continue to exacerbate a global glut. Rising U.S. production is contributing to a surplus that drove prices almost 50 percent lower in 2014.
In China, the falling prices “will probably affect market expectations and behaviors,” the central bank said.