China’s central bank hints at possibility of higher 2020 inflation target for more monetary leeway

Developing countries can set their annual inflation targets at 4 per cent or higher, the head of China’s central bank has said, possibly suggesting that China – which sees itself as a developing nation – is considering raising next year’s level to compensate for soaring pork prices.

In a signed article published on Sunday in Qiushi, the top Communist Party magazine, Yi said central banks should set inflation targets anywhere between 1 per cent and 4 per cent based on their domestic economic conditions and development status.

“Developed countries and ageing economies could set [a target of] 1 or 1.5 per cent, but developing countries and economies with young populations could choose 3 or 4 per cent. Some could even set a target higher than 4 per cent,” he said.

Despite the article, a number of analysts said they doubted China would raise next year’s inflation target.

“If the [gross domestic product] target is lowered but the CPI target is raised, it would increase market speculation of stagflation, which the government will want to avoid,” said Zhou Hao, a senior emerging market economist of Commerzbank, who expects the government will keep the 2020 CPI target unchanged at 3 per cent.

On the other hand, some economists noted that higher consumer prices could help China overcome deflation risks, with the producer price index having fallen into negative territory for the last four months, meaning factories are cutting the prices of the products they sell.

“A higher consumer price would be a desirable outcome, against the global fear of deflation,” said Ding Shuang, chief Greater China economist of Standard Chartered Bank. Still, he expects a tapering off of consumer prices later in the year to allow the government to maintain a 3 per cent inflation target for 2020.