China still needs to prevent a rebound in consumer price inflation even as growth of the world's second-largest economy slows, the People's Bank of China said on Wednesday, suggesting further policy easing will be gradual.
In its monetary policy implemention report for the fourth quarter of 2011, the central bank said it will use a mix of policy tools, including interest rates, to maintain reasonable credit growth while keeping a lid on inflation.
"Our policies will become more targeted, flexible and pre-emptive, and we will make timely and appropriate fine-tuning to keep prices basically stable as well as fast economic growth," the central bank said in the lengthy report.
"We will deploy a mix of monetary policy tools to control the pace of credit supply and keep overall social financing at a reasonable amount," it said.
While China's economy is slowing, its consumer price inflation still faces upward pressures from loose global liquidity and commodity prices, the central bank said.
Annual inflation rebounded to 4.5 percent in January as prices jumped during the Chinese Lunar New Year holiday season, breaking a five-month softening trend and forcing a market rethink of policy easing expectations.
An official from the country's top planning agency predicted this week that inflation will ease to about 3 percent in February. But analysts believe inflation will remain entrenched in the coming months.
"The stable domestic demand, normalising monetary conditions, grain harvest and a moderating global economy are conducive to stable consumer prices," the central bank said.
"Global liquidity will remain loose and prices of commodities including crude oil will probably rise further. Therefore, it's necessary to guard against a rebound in consumer inflation."
Europe's debt crisis poses a systemic threat to the global economy and the lack of credible fiscal responses in major economies will hamper global recovery, the central bank said.
China's economic growth is set to slow further in the first quarter, probably to just over 8 percent from 8.9 percent in the previous quarter.
But the gradual slowdown in the economy will help to contain inflationary risks and help the country's structural adjustments, the central bank added.
GRADUAL POLICY EASING
The central bank is fine-tuning its policy to head off a sharper growth slowdown, but it is reluctant to give the green light to another bout of big bank lending, analysts say.
"Any big steps in policy easing look very unlikely given the central bank's caution over inflation," said Hua Zhongwei, an economist at Huachuang Securities in Beijing.
The central bank expects the broad M2 money supply to grow 14 percent this year, it said. It was broadly in line with market expectations.
Sources familiar with government plans said last month that China has set a target of 8 trillion yuan in new local-currency bank loans and 14 percent growth in broad M2 money supply for 2012.
That marks a rise from 7.47 trillion yuan in new bank loans and annual M2 growth of 13.6 percent achieved in 2011, implying a steady policy loosening to support the slowing economy.
The central bank cut banks' reserve requirement ratio (RRR) in November for the first time in three years, taking 50 basis points off the record 21.5 percent level. More cuts are expected in coming months.
The central bank has since opted for a more flexible way of injecting cash to support the slowing real economy via open market operations.
Few analysts believe the central bank will pull the trigger on benchmark interest rate cuts any time soon, with annual inflation staying stubbornly higher than the one-year deposit rate of 3.5 percent.
The central bank said it will increase the two-way swings in the yuan while keeping the currency within a "reasonable" range.
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