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MNI China Press Digest July 22: Transport, Monetary, Power
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Renewed conflict in the Persian Gulf is consolidating the case for further tightening by the European Central Bank, Eurosystem sources told MNI, but while some hawkish Governing Council members are likely to make the case for a back-to-back rate hike this week after June’s move, waiting until September remains much more likely.
At least a few officials are expected to raise the argument for acting now, capitalising on the spike in oil prices to press for an earlier move than the September consensus implies, sources told MNI.
“I'm sure some of my more hawkish colleagues will be looking at perhaps doing what we may have to do now. They will argue 'if we think a September hike is necessary, lets hike now - why wait',” one national central bank source said. “It isn't a view I hold and I still see the vast majority of the GC as ready to wait for September.”
The view was echoed by another Eurosystem source, who “wouldn't be surprised if some of the hawks made a point of calling for a hike now rather than later.”
Still, the case for waiting remains stronger, the source said, casting doubt on any suggestion that data now portrays a significantly different inflation outlook to June’s.
“We are close to the baseline scenario, so no real surprises for us. We can sit back on our Framework Guidance and assess data over the summer,” another Eurosystem source said.
It is unclear whether any hawks arguing for a hike at Thursday's meeting would push strongly enough to record a formal dissent, which would break the Council’s recent run of unanimity, officials noted.
"Worst case scenario I could see a non-unanimous decision," one official said. "But my sense is that we need to project the impression of cooler heads being around the table and not people reacting to instant news." (See MNI INTERVIEW: ECB 'May Have To Do A Little Bit More' - Wunsch)
SEPTEMBER BASELINE
For most officials, the firmest analytical ground for policy decision will have been laid by September’s meeting, which will be accompanied by new staff projections.
“Certainly we believe another 25 basis points will be needed in September if nothing changes dramatically," one source said.
In the meantime, Thursday's messaging is expected to be tightly controlled, in line with the ECB’s insistence on its data dependent, meeting-by-meeting approach, and pointing to its three-pillar reaction function as well as the framework guidance outlined in President Christne Lagarde's Sintra speech as a template. Statement and press conference will emphases full optionality and no clear rate path ahead. (See MNI INTERVIEW: ECB Strategy For Uncertain Times -Kazaks)
Still, Lagarde is expected to keep September firmly in play for a possible rate hike, if only by not taking it off the table.
Though officials told MNI that a hike at September’s meeting is extremely likely, one cautioned against any clear signalling, due to the elevated uncertainty.
"Conditionality is key when discussing possible moves, as uncertainty at present sees wide variations from day-to-day, let alone week-by-week, or month to month" another policymaker said.
An ECB spokesperson declined to comment.
Jul-21 16:05
The European Union hopes to arrive at an understanding with China which allows it to protect its threatened industries and gradually reduce its excessive dependence on Chinese supply chains whilst also avoiding a damaging trade war, EU officials and people following talks told MNI.
The initial signs from Chinese officials following the launch of a consultation mechanism on trade and investment at the end of June are that Beijing might be prepared to consider such an approach, and perhaps to voluntarily limit some exports, with European officials explaining that it is only reasonable that they take measures given existential threats to their automotive, chemicals and machinery sectors in particular, they said. The recent announcement of 100,000 job losses at Germany’s Volkswagen has underlined how quickly China has risen to threaten Europe’s key industries both at home and in their major export markets.
A key part of the EU’s strategy will be the proposed Industrial Accelerator Act, which aims to boost manufacturing to 20% of GDP by 2035 and would introduce “Made in Europe” requirements for public procurement while overseeing foreign direct investment more strictly. In comments to the European Parliament last week, the European Commission's Chief Trade Enforcement Officer Denis Redonnet said that it seemed likely that safeguarding measures could be adopted in some cases without derailing the China dialogue, given that such actions are WTO compliant.
Redonnet’s comments suggested Commission backing for a kind of "managed, quota-based trade" relationship with China, said EU-Asia trade expert and Natixis Asia Chief Economist Alicia Garcia-Herrero. (See MNI INTERVIEW: Industry Unconvinced By EU China Strategy)
TRADITIONAL WEAPONS
The Commission’s traditional weapons of anti-dumping and countervailing duties to shield specific sectors also remain options, former senior Commission official and Bruegel Senior Fellow Ignacio Garcia Bercero told MNI, adding that one of the first sectors the EU could seek to protect in coming months is likely to be plug-in hybrid EVs.
"I heard also some parts of the chemical industry and part of the machinery sector. These seem to be the areas which are the core of European manufacturing and seeing the most rapid surge in imports,” Bercero said. (See MNI INTERVIEW: EU Needs 'Credible Threat' Against China)
The Commission’s drive for a consensual reduction in Europe’s trade imbalances with China comes after a debate within the EU of how to deal with Beijing, with France favouring a more aggressive approach but others including Germany, with its big investments in China, more concerned about preserving a trade relationship. Some countries, notably Spain, have also argued that Chinese direct investment in the bloc will be key to economic growth.
According to Redonnet, the EU aims to reduce dependence on Chinese supplies from levels above 90% in some sectors to 50% in coming years. Beijing must be aware that its 90% domination of some supply chains is a "double-edged sword," given the importance to China of Europe’s continued prosperity, an EU source close to EU-China trade developments told MNI.
"Sure, it gives them massive leverage but there would be ramifications in terms of global economic instability. It would also result in many of their other markets too seeking to diversify away from China,” the EU source said.
Senior Commission officials and their Chinese counterparts will continue technical-level talks through August, focused firstly on reconciling their interpretations of the current state of current trade flows before tackling the question of what to do about them. European Trade Commissioner Maros Sefcovic and Commerce Secretary Wang Wentao are set to meet in Beijing in October.
Jul-21 11:26
A stronger-than-expected boost from the artificial intelligence boom is likely to prompt the Bank of Japan to revise up its median fiscal 2026 GDP growth forecast from the 0.5% projected in April to between 0.5%-0.8% when the Board meets this month, MNI understands, although the final projection will depend heavily on movements in crude oil prices ahead of the meeting.
Bank officials had initially believed the AI boom was benefiting mainly large manufacturers, limiting its impact on overall economic growth. They now judge that smaller firms in regional areas are also seeing stronger demand related to AI, although the effect on capital expenditure and broader economic activity remains uncertain. At the same time, higher costs stemming from the weak yen and efforts to diversify sources of raw materials continue to increase financial pressure on businesses, weighing on corporate profits.
The BOJ believes the economy remains broadly on track, consistent with its June assessment that the risk of a significant slowdown had diminished compared with earlier this year.
Bank lending continues to expand steadily in nominal terms, but officials are closely monitoring whether the additional credit is financing productive capital investment in real terms, as firms have also been increasing investment in real estate and financial assets. While overall financial conditions remain accommodative, some smaller firms are facing rising borrowing costs, highlighting uneven financing conditions across the economy.
OIL PRICES
Lower crude oil prices compared with April are also supporting economic activity, although the bank is expected to maintain its view that downside risks remain. While the renewed conflict in the Middle East has increased uncertainty over the global economy and energy prices, keeping BOJ officials cautious about the outlook for growth and inflation, movements in crude oil immediately ahead of the July 30-31 policy meeting are also likely to influence the bank's updated GDP forecast. The BOJ is widely expected to leave the policy rate unchanged at 1.0%.
Jul-21 06:56
Federal Reserve officials are increasingly worried they will have to raise interest rates later this year despite cooler-than-expected June inflation readings, and even a single hot report could trigger a hike.
Last week's benign June data create some breathing room to hold off on a rate hike at the July 28-29 meeting, but it would likely take several months of consistent improvement in the inflation outlook in order to dissuade policymakers from raising rates. Meanwhile, a bad inflation number could trigger a hike by as soon as September.
A broad range of FOMC members is expressing impatience with the persistence of inflation, which has been above the 2% target for over five years and moving in the wrong direction for most of 2026. (See MNI INTERVIEW: Ex-Fed's Bullard Sees Several Rate Hikes Ahead)
PRICE PRESSURES BUILD
One factor driving these concerns is the surprising amount of inflation emanating from relentless demand for AI capital investments. A boom that first appeared to have dovish implications for monetary policy is now fodder for hawkish concerns – in particular, the prospect that demand in the sector could continue outstripping supply for years.
At the same time, despite tariffs, immigration curbs and geopolitical uncertainty, the labor market appears stable and near what the FOMC views as full employment. The drag on employment that many worry could be wrought by AI also has yet to materialize.
The Fed is heartened that the effect of tariffs on inflation was not as significant as feared, and most officials believe those impacts have already mostly been felt. But core inflation drifted higher in the spring, with a breadth of price pressures reminiscent of the Covid era, with elevated core services costs a particular source of concern.
The energy picture is also uncertain. Prices came down sharply after the brief cease-fire in Iran but have resumed their climb since hostilities restarted. Oil prices are unlikely to reignite core services inflation, but more data is needed to confirm this.
RENEWED COMMITMENT
Officials believe that concrete action in the form of tighter policy would underline Fed Chair Kevin Warsh’s repeated commitment to restoring price stability. That could mean a rate rise as early as September, even if the political calendar with a looming midterm election in November appears as a complicating factor.
While Warsh has made a concerted effort to reduce the amount of forward guidance the Fed offers on the path of rates, the tone of officials’ comments on the inflation outlook speaks to the momentum toward action.
“I have taken notice of data that show the risks to our dual mandate have shifted more toward price stability and away from employment,” Fed Governor Lisa Cook said in a speech last week, before the start of the pre-meeting blackout period. “While I will decline to predict the path of policy today, I will underscore that I am committed to returning inflation to our 2% goal.”
The Fed’s June Summary of Economic Projections showed a large jump in officials’ inflation forecasts – up to 3.6% from 2.7% for the PCE index – and a corresponding rise in the number of those penciling in one or more rate hikes for this year.
One complicating factor is that parts of the inflation outlook offer some measure of comfort. The decline in shelter costs, for instance, looks set to remain a drag on overall price growth. Wage growth is still above pre-pandemic levels but has gradually receded to levels the Fed sees as consistent with price stability.
Still, the onus remains on the next round of inflation reports to keep delivering positive surprises. That could be the last plausible line of defense against a near-term increase in the federal funds rate.
Jul-20 15:51
(Repeats story first published on July 17.)
Canadian exports are rebounding to new records a year after the U.S. imposed major tariffs, and the unexpected strength erodes the case for lower central bank interest rates as oil prices rise again, the chief economist of the government's trade finance bank told MNI.
"There isn't as much urgency around a rate cut, and it allows the Bank to sort of let it ride for a little bit to see which of the two risks is most urgent to deal with," Export Development Canada's Stuart Bergman said, predicting the central bank will stay on hold until late next year. "We're seeing the same thing frankly in the United States as well with respect to the decisions of the Fed."
Governor Tiff Macklem on Wednesday held his key lending rate at 2.25% and dropped language about potential for consecutive hikes or a cut, returning to language about being able to hold. He later told reporters the risk of hikes remains if oil prices feed into broader inflation, while noting exporters are benefitting from a strong U.S. economy and adapting to trade uncertainty.
"Exporters are figuring out ways to work around this new trade environment," Bergman said. "The Canadian economy is carrying a lot better than many people had feared." (See: MNI INTERVIEW: Resilience Keeps BOC On Hold- Ex Adviser Ragan)
GLOBAL RISK, CANADA REWARD
Canadian merchandise exports grew to a record CAD77 billion in May. The trade balance swung to a surplus of CAD4.2 billion from a deficit of CAD5.7 billion a year earlier.
While gains are concentrated in energy and gold there are signs of overall improvement. Even excluding the jump in oil and gold prices export volumes have climbed this year, and the share of firms filling out paperwork to have a tariff exemption under USMCA has doubled to more than 80%, Bergman said.
"There is enormous demand again for Canadian commodities," Bergman said, "given increased risk on the geopolitical risk side of things." Canadian leaders have also become motivated to develop the infrastructure needed to diversify exports to non-U.S. markets, he said. Non-U.S. exports rose 16% last year, he said.
Weakness among exporters hurt by U.S. tariffs is a prime reason some economists over the last year forecast a recession that would lead the Bank to cut rates. (See: MNI INTERVIEW: Canada Nowhere Near Recession- Ex BOC Adviser)
Economic output did shrink in the fourth quarter and stalled in the first quarter but the Bank lifted its second quarter forecast a full percentage point to 2.5% annualized. Bergman predicts Canada's economy will grow 1% in 2026 and quicken to 2.1% in 2027, including gains in business investment as firms adjust to the tariff hit.
MEXICO MORE AT RISK?
U.S. President Donald Trump is unlikely to abandon USMCA according to Bergman. While many people believe the failure to meet a July 1 deadline for a full renewal of the deal means it's up for a substantial review, Bergman says the agreement specifies more limited technical talks.
"Strong U.S. congressional and business support for the agreement, in my view, makes a unilateral U.S. withdrawal less likely," Bergman said.
Areas of contention appear limited to areas mapped out in prior discussions, he said, such as agriculture, finance, and entertainment. Trump has complained about Canada's dairy quota system and pressured Canada to remove a "Netflix tax" aimed at funding local artists.
Experts MNI has interviewed see little chance Prime Minister Mark Carney will succeed in removing major tariffs on steel, autos and aluminum. (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)
Canada may still do well compared with Mexico when it comes to Trump's desire to shield the U.S. from what he calls unfair competition from China, Bergman said. "It's been well documented that many U.S. imports from China, to the extent that they were closed off, were redirected through Mexico, and you can see it in the data," he said.
Jul-20 11:24
The People's Bank of China is likely to step up monetary easing this quarter after the Loan Prime Rate remained unchanged this month, as Q2 GDP fell below the government's target range and weak domestic demand continued to weigh on the economy.
Authorities held the LPR at 3.0% for the one-year tenor and 3.5% for the five-year tenor and above on Monday, marking the 14th consecutive month of unchanged rates. Both were lowered by 10 basis points in May 2025 after the PBOC cut its seven-day reverse repo rate – its key policy rate – by 10bp to 1.4% on May 8, followed by a 50bp reduction in the reserve requirement ratio on May 15.
Expectations for further policy rate and RRR cuts have risen after Q2 data highlighted mounting economic headwinds, with GDP growth slowing to 4.3% y/y – the weakest in more than three years and below the government's 2026 target range of 4.5-5.0%. (See MNI PBOC WATCH: July LPR To Hold On Cheap Loans And Inflation)
Zhang Ming, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told MNI the central bank is likely to cut both the policy rate and the RRR. Lower borrowing costs would reduce mortgage rates and support housing demand in first- and second-tier cities, a key step towards stabilising property prices nationwide, he said. Zhang also expects additional fiscal stimulus to be announced as early as the Politburo meeting later this month, including an increase in the quota for special treasury bonds. (See MNI INTERVIEW: China Likely To Announce New Fiscal Stimulus)
Q3 CUT
The slowdown in investment and consumption, alongside the prolonged property downturn, has significantly increased the need for counter-cyclical policy support, said Dong Ximiao, chief economist at Merchants Union Consumer Finance. Dong expects the PBOC to cut the policy rate by 10-20bp in the second half of the year, lowering the LPR by 5-10bp. He believes the central bank could ease policy at the end of Q3, or sooner if the upcoming Politburo meeting adopts a more supportive policy stance.
A further RRR cut also remains highly likely, helping reduce banks' funding costs and creating room for lower lending rates, Dong added.
Wang Qing, chief macro analyst at Orient Golden Credit Rating International, also expects a 10bp policy rate cut in Q3, followed by declines in the LPR and money market rates. Exports are unlikely to maintain their rapid pace of growth, while domestic consumption and investment require stronger policy support, Wang said. He added that the yuan has remained broadly stable and has strengthened modestly this year, providing favourable conditions for further monetary easing.
Jul-20 09:27Canadian exports are rebounding to new records a year after the U.S. imposed major tariffs, and the unexpected strength erodes the case for lower central bank interest rates as oil prices rise again, the chief economist of the government's trade finance bank told MNI.
"There isn't as much urgency around a rate cut, and it allows the Bank to sort of let it ride for a little bit to see which of the two risks is most urgent to deal with," Export Development Canada's Stuart Bergman said, predicting the central bank will stay on hold until late next year. "We're seeing the same thing frankly in the United States as well with respect to the decisions of the Fed."
Governor Tiff Macklem on Wednesday held his key lending rate at 2.25% and dropped language about potential for consecutive hikes or a cut, returning to language about being able to hold. He later told reporters the risk of hikes remains if oil prices feed into broader inflation, while noting exporters are benefitting from a strong U.S. economy and adapting to trade uncertainty.
"Exporters are figuring out ways to work around this new trade environment," Bergman said. "The Canadian economy is carrying a lot better than many people had feared." (See: MNI INTERVIEW: Resilience Keeps BOC On Hold- Ex Adviser Ragan)
GLOBAL RISK, CANADA REWARD
Canadian merchandise exports grew to a record CAD77 billion in May. The trade balance swung to a surplus of CAD4.2 billion from a deficit of CAD5.7 billion a year earlier.
While gains are concentrated in energy and gold there are signs of overall improvement. Even excluding the jump in oil and gold prices export volumes have climbed this year, and the share of firms filling out paperwork to have a tariff exemption under USMCA has doubled to more than 80%, Bergman said.
"There is enormous demand again for Canadian commodities," Bergman said, "given increased risk on the geopolitical risk side of things." Canadian leaders have also become motivated to develop the infrastructure needed to diversify exports to non-U.S. markets, he said. Non-U.S. exports rose 16% last year, he said.
Weakness among exporters hurt by U.S. tariffs is a prime reason some economists over the last year forecast a recession that would lead the Bank to cut rates. (See: MNI INTERVIEW: Canada Nowhere Near Recession- Ex BOC Adviser)
Economic output did shrink in the fourth quarter and stalled in the first quarter but the Bank lifted its second quarter forecast a full percentage point to 2.5% annualized. Bergman predicts Canada's economy will grow 1% in 2026 and quicken to 2.1% in 2027, including gains in business investment as firms adjust to the tariff hit.
MEXICO MORE AT RISK?
U.S. President Donald Trump is unlikely to abandon USMCA according to Bergman. While many people believe the failure to meet a July 1 deadline for a full renewal of the deal means it's up for a substantial review, Bergman says the agreement specifies more limited technical talks.
"Strong U.S. congressional and business support for the agreement, in my view, makes a unilateral U.S. withdrawal less likely," Bergman said.
Areas of contention appear limited to areas mapped out in prior discussions, he said, such as agriculture, finance, and entertainment. Trump has complained about Canada's dairy quota system and pressured Canada to remove a "Netflix tax" aimed at funding local artists.
Experts MNI has interviewed see little chance Prime Minister Mark Carney will succeed in removing major tariffs on steel, autos and aluminum. (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)
Canada may still do well compared with Mexico when it comes to Trump's desire to shield the U.S. from what he calls unfair competition from China, Bergman said. "It's been well documented that many U.S. imports from China, to the extent that they were closed off, were redirected through Mexico, and you can see it in the data," he said.
Jul-17 15:41
(Repeats story first published on July 17)
The Bank of Canada has good reason to keep interest rates on hold for a while because the economy is showing resilience to shocks from oil inflation and U.S. tariffs that helps moderate inflation and are outside the easy reach of monetary policy, former adviser Chris Ragan told MNI.
"There's been a bit of a surprise at how resilient the Canadian economy has been, even during this sort of weak time," said Ragan, a McGill University professor who has also served as a special adviser to Canada's finance department.
"I think he wants to avoid getting pushed into really low rates again, from which he'd have to come back," Ragan said of Macklem's views. "He kind of wants to get to normal."
Canada's GDP stalled in the first quarter after shrinking in the fourth but Governor Tiff Macklem held the key rate at 2.25% Wednesday and boosted this second quarter growth call by a full percentage point to 2.5%. The Bank has a single mandate to keep inflation at 2% and its new forecast also showed things normalizing with headline price gains seen slowing from about 3% now back to target early next year.
KEEPING CREDIBILITY
"The Bank is basically at the low end of its suggested range for the neutral rate, so I think you've got a pretty good argument for Tiff to just say, yeah, we're just not going to do much," Ragan said. (See: MNI INTERVIEW: BOC Can Delay Hike To Neutral Til 2027-Mc Mahon)
“The oil prices are caused by a supply disruption in the Middle East, that's clearly not directly fixable by monetary policy, and I think a pretty good argument is that most of the Canadian weakness is caused by trade and tariff uncertainty, and that's not directly fixable by monetary policy,” Ragan said.
The latest rate decision dropped earlier signals about potential for either consecutive hikes or a cut, returning to an earlier view that the overnight rate is about right to rebalance the economy. The Governor later told reporters consecutive hikes could be needed if there is another bump in oil prices.
“The Bank has to just keep enforcing that credibility, and you do that by saying, 'Okay, we're prepared to raise rates, you know, when we have to,'" Ragan said. Part of the reason price expectations have been contained so far is the long-run credibility officials won after painful past fights to curb excessive price growth, he said.
MANDATE REVIEW
The Bank of Canada has a mandate review later this year and unlike Fed Chair Kevin Warsh's signals of a big overhaul Macklem this time has limited the scope of questions, citing a consensus about the job to be done.
While the broad strokes are right Macklem needs to remove language added last time about seeking higher employment when the inflation mandate is set, Ragan said. The last five-year agreement was made in tandem former finance minister Chrystia Freeland and Ragan said that agreement had "some deep incoherence."
One change Macklem has signaled is adding language about a world more prone to supply shocks, which Ragan said is worthwhile.
“If it is true that we are in a world of greater frequency and maybe even a greater average size of supply shocks, then okay, monetary policy is going to be harder," Ragan said. "I don't think it's an argument for adding in stuff about maximum employment.”
Another looming shock is Prime Minister Mark Carney's plans to meet the NATO target where 5% of GDP is spent on defense, up from less than 2% in recent decades. Carney has said that will happen over the next decade. "We should absolutely expect that as this big fiscal expansion happens over the next few years, that will tend to push up interest rates higher than they would otherwise be," Ragan said.
Jul-17 12:08
China's Loan Prime Rate is expected to remain unchanged in July as the People's Bank of China keeps policy rates on hold amid record-low borrowing costs and easing deflationary pressures.
The one-year LPR is expected to remain at 3.0% and the five-year rate at 3.5% on Monday, marking the 14th consecutive month without change. Both rates were last cut by 10 basis points in May 2025 after the PBOC lowered its seven-day reverse repo rate – its benchmark policy rate – by 10bp to 1.4% on May 8, followed by a 50bp cut in the reserve requirement ratio on May 15, largely to counter tariff-related shocks.
PBOC Deputy Governor Zou Lan told reporters on Wednesday that the weighted average interest rate on newly issued corporate loans fell to 3.0% in June, down 20bp from a year earlier and "already at a historical low," adding the central bank would adjust interest rate levels in line with economic conditions and price trends.
The decline in lending rates has compressed banks' net interest margins to a record low of 1.40% in the first quarter of 2026, putting further pressure on profitability as weak credit demand persists. Banking sector net profit fell 3.73% y/y in Q1, with smaller lenders suffering the sharpest declines.
Advisors told MNI that while China's rapidly expanding high-tech industries are primarily served by large banks, small and mid-sized lenders, which remain heavily exposed to stagnating sectors, are struggling with rising non-performing loans and weak credit demand. (See MNI: China's Small Banks Hit As Old Economic Sectors Struggle)
Authorities are expected to accelerate consolidation, recapitalisations and, where necessary, the resolution of small and mid-sized lenders, Song Ke, deputy director of the China Banking Research Center at Renmin University of China, told MNI. Regulators have also curbed high-yield deposits and moderated the pace of policy rate cuts to limit further compression of banks' net interest margins, added Li Keying, senior analyst at Orient Golden Credit Rating International.
RISING INFLATION
According to analysts' calculations based on the latest National Bureau of Statistics data, the GDP deflator rose 1.6% y/y in the second quarter, ending 12 consecutive quarters of negative readings. The GDP deflator measures price changes across all final goods and services produced in the economy and is a broader gauge of inflation than the producer and consumer price indexes. The turnaround was driven mainly by higher crude oil and commodity prices amid geopolitical tensions in the Middle East, lifting producer costs and contributing to a notable rebound in producer prices.
However, Zhang Ming, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, argued that the PBOC should not slow the pace of monetary easing because of an oil-driven rise in inflation while domestic demand remains weak, adding that inflation is likely to ease again in the second half without additional stimulus. (See MNI INTERVIEW: China Likely To Announce New Fiscal Stimulus)
Some advisors argued that quantitative easing should be considered as conventional monetary policy becomes less effective, given banks' already compressed net interest margins. Zhu Tian, vice president of CEIBS, proposed that the central government issue CNY8 trillion of treasury bonds to support consumption and stabilise the property sector. The PBOC could then purchase the bonds in the secondary market through commercial banks, he said.
Jul-17 07:18
The Bank of Japan believes private consumption has remained resilient despite rising goods and services prices, supported by household savings and front-loaded spending, suggesting any subsequent slowdown is likely to be limited and unlikely to derail its gradual rate-hike path, MNI understands.
Increasing purchases of durable goods, particularly air conditioners, alongside non-durable daily necessities have lifted overall consumption, according to government and BOJ data.
But Bank officials have confirmed through anecdotal evidence and other information that front-loaded demand has also boosted recent consumer spending, complicating efforts to gauge the underlying strength of household consumption. Unlike the surge in spending ahead of previous consumption tax hikes, however, the latest bout of front-loaded demand appears relatively modest and officials are closely monitoring when and to what extent the subsequent pullback will weigh on private consumption as they assess the economy's ability to withstand further interest-rate hikes.
MNI reported this week that the Bank would prefer to gauge inflation expectations in the September Tankan, due Oct. 1, before raising rates again, unless a sharp weakening of the yen prompts earlier action. (See MNI POLICY: BOJ To Eye Expectations Ahead Of Additional Hike)
PASS THROUGH
Officials expect consumer inflation to accelerate as firms pass higher costs on to consumers from around July onward, weighing further on real wages and eroding households' purchasing power.
The pass-through of higher costs is occurring more quickly than in previous inflation cycles, while the weaker yen is exerting a greater upward influence on prices, prompting the BOJ to remain vigilant over inflation risks and their potential impact on household spending.
Although real wages have remained positive, officials expect real-wage growth to slow and potentially turn negative, putting renewed downward pressure on private consumption. Inflation-adjusted real wages, a key gauge of households' purchasing power, rose 1.4% y/y in May after increasing 2.0% in April, marking a fifth consecutive monthly gain, government data showed.
Jul-17 05:08About
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