Consumer price inflation ticked down again in September, being 1.9% year-on-year, down from August’s 2%. That was much as expected and leaves inflation running well below the official target for the year of 4%. Officials have been signaling 2.7% as the likely number for the full year.
That would still appear to leave policymakers plenty of headroom for further easing of monetary policy, should they choose to use it. The central bank has cut interest rates twice since June and lowered banks’ required reserves three times since November. Yet its main way to pump up sagging growth has been to open the liquidity taps. The broad measure of the money supply, M2, grew by 14.8% in September, its most rapid monthly expansion since June last year, and above the central bank’s 14% target number for the year.
However, the liquidity taps have been opened cautiously and with some trepidation by the central bank. Zhou Xiaochuan, governor of the People’s Bank of China, writing in the latest edition of the Journal of Financial Research, a house organ of the bank’s, is talking of closer to home when he warns of the inflationary risks in the efforts around the world to shore up the sluggish global economy by easing monetary policies. He encouraged central bankers to be ready to start mopping up operations.
At home, property prices are resurging, propelled by the increase in liquidity. Policymakers have fought a two-year-long battle to deflate the property bubble without bringing down the whole house of cards. They will not readily throw that hard-won victory to the winds. With third-quarter GDP growth figures due on Thursday, we’ll get a sighting of how much of the headroom that falling inflation has provided, the central bank has a taste for.