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China’s Central Bank Sees ‘Modest’ Rebound for Consumer Prices

(Bloomberg) -- China’s central bank projects a modest rebound in consumer costs, as the world’s second-largest economy battles its worst streak of price drops in years.

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“Consumer prices are expected to rebound modestly,” the People’s Bank of China wrote in its quarterly monetary report published Thursday, in which it largely reiterated its assessment that monetary conditions are “reasonable and appropriate.”

“The country is in a critical period of economic recovery and industrial transformation,” the central bank said, adding that “there is no long-term basis for deflation or inflation” since supply and demand is expected to improve.

The reassurances from the central bank came hours after China reported that consumer prices fell in January at the fastest pace since the global financial crisis, piling pressure on the government to roll out more support for the economy. Economists warned that the weak data — which also marked the fourth straight month of year-on-year declines — signaled a need for the country to take aggressive action to prevent deflation expectations from becoming entrenched.

Policymakers have ramped up support in recent weeks, particularly in a bid to arrest a $7 trillion stock rout that has signified the extent to which confidence in China is in a dire state. Steps have included taking aim at short-sellers and even ousting the nation’s market chief.

On the monetary policy side, PBOC Governor Pan Gongsheng took the unusual step late last month of front-running a cut to the reserve requirement ratio, which determines how much cash banks have to keep in reserve. The central bank may also ease further later this month by cutting a key policy rate, though many economists are still expecting officials to hold that rate steady for now.

In its policy report, the PBOC vowed to step up policy coordination and support consumption as well as investment, so prices stay within a reasonable range. It also pledged to push for the development of the corporate bond market, and said it would step up its monitoring of liquidity within the banking system.

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