China: Oil spike will lift inflation while monetary easing continues – ANZ

In view of analysts at ANZ, China’s headline inflation will move higher amid the surge in global oil prices and recent geopolitical tensions.

Key Quotes

“We expect limited impact as the Chinese authorities has price control mechanisms in place in the energy and related sectors.”

“Our model shows that if oil prices increase 10% in 2020 from their average level in 2019, it will add 0.3ppt and 0.7ppt to our baseline CPI forecast (to 3.8%, from 3.5%) and PPI forecast (to 0.3%, from -0.4%).”

“However, an oil shock is unlikely to prompt Chinese policymakers to tighten monetary policy, in our view. The PBoC will maintain an easing bias, given its concerns about financial stability. We thus maintain our forecast for another 50bp reduction in the reserve requirement ratio (RRR) in 2020 after the cut announced on 1 January.”

“The current oil shock is unlikely to increase China’s demand for USD significantly even though oil companies remain active in the FX market.”