Monetary policy gets geopolitical
China’s monetary policy is being increasingly guided by international events.
In its Q1 Monetary Policy Report the central bank (PBoC) noted that the Iran war had driven up commodity prices – putting an end to domestic deflation – and that:
- “The impact of externally driven inflation on the domestic economy warrants close attention”
It also said it will:
- “Better coordinate domestic and international priorities”
ICYDK: That phrasing is often used by Xi Jinping and refers to aligning domestic development with foreign policy interests.
- The PBoC hasn't previously used the phrase when discussing monetary policy.
Additionally, the PBoC said it will:
- “Closely monitor changes in the monetary policies of major overseas central banks”
That’s boilerplate text that’s been in every monetary policy report for the last two years – except the last one (Q4 2025) when it was dropped.
The PBoC said its commitment to maintaining a “moderately loose monetary policy” remains unchanged.
- However, its approach would be “flexible,” whereas previously it had been “comprehensive.”
Get smart: At the very moment the PBoC thought international conditions were becoming less relevant, the Iran war flipped the script.
Get smarter: Before the war, the PBoC was eying an an interest rate cut – assuming it could first lift banks’ net interest margins (NIMs).
- The PBoC’s new “flexible” approach to monetary policy means a cut is no longer baked in.
Our take: Monetary authorities will continue trying to lower bank funding costs so that rate cuts remain an option, but not an eventuality.