ING expects Chinese inflation dynamics to have limited impact on People’s Bank of China policy in 2026. Lynn Song argues that CPI will again undershoot an expected 2% target, but this shortfall should not constrain monetary decisions. ING still sees room for further easing in 2026, including a potential 10bp rate cut and 50bp Reserve Requirement Ratio reduction in the first half.

Inflation undershoot supports further easing

"When we get the 2026 economic targets at the Two Sessions in March, we're likely to see an inflation target of around 2% YoY, unchanged from 2025's goal. CPI inflation has fallen short of target for the past few years, and historically the target had been to limit the upside for inflation rather than the downside."

"As such, even though we are forecasting CPI inflation to come comfortably short of the 2% target this year, it is not likely to substantively affect the People's Bank of China's decision-making. This will likely be more in consideration of the broader macro trends, as well as considering the potential impact on banks and markets as a whole."

"Given the soft domestic indicators over the past few months, we still think there is a solid case for further easing this year, and expect there will be room for the first move in 1H26, likely to start off with a 10bp rate cut and a 50bp Reserve Requirement Ratio cut."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)