Room seen for buffering pressure amid US inflation

China still has the space for interest rate cuts to buffer economic downward pressure, though the room for easing may narrow, as the United States is poised to act more aggressively against stubbornly high inflation, experts said on Wednesday.

They commented as US consumer prices increased more than forecast in August, defying expectations that the US Federal Reserve may slow down its tightening pace upon softer inflationary pressure.

The US Department of Labor reported on Tuesday that US inflation — as measured by growth in the consumer price index — came in at 8.3 percent year-on-year in August, down from 8.5 percent the previous month but above the consensus estimate of 8.1 percent.

With the reading pointing to resilient demand propping up price levels, markets now expect the Fed to impose an interest rate hike of as much as 75 or 100 basis points next week, compared with the previous estimate of 50 or 75 basis points.

Experts said the Fed may end up raising its benchmark rate to above 4 percent from the current range of 2.25 percent to 2.5 percent, which may intensify the negative spillovers on other economies by driving capital back to the US and hurting global demand.

Thanks to a robust trade surplus and a more flexible exchange rate of the renminbi, China is expected to see manageable impacts of the Fed's ongoing tightening and retain the space for monetary easing, they said.

Shao Yu, chief economist at Orient Securities, said there is still room for China to tamp down interest rates based on domestic economic conditions, as the growing flexibility of the renminbi exchange rate helps absorb the negative impacts of the Fed's tightening.

However, the room for monetary easing may be inevitably narrowed by the Fed's rate hikes, which could further push up US Treasury yields. The yields already stand above their Chinese counterparts and cause capital outflow pressure on China, Shao said.

While experts expect the People's Bank of China, the country's central bank, to keep the interest rate of medium-term lending facility operations — a key policy benchmark — unchanged on Thursday, they said slight reductions in the rate are still possible in the coming months.

Wang Tao, head of Asia economics at UBS Investment Bank, said China's monetary policy is able to play a bigger role in stabilizing the economy by reducing policy interest rates and market mortgage rates, given the country's stable inflation prospects.

Ruan Jianhong, a spokeswoman for the central bank, said earlier this month that China has refrained from excessive stimulus in the face of COVID-19, and mild consumer inflation remained, creating room for future monetary policy adjustments.

Ying Xiwen, a senior researcher at China Minsheng Bank, said, "The disruption of the Fed's tightening on China's monetary policy and interest rate market should be limited."

Ying added that a moderately weaker renminbi can help boost China's exports, offsetting the potential slowdown in external demand due to the Fed's tightening.