BofA | China Viewpoint: Higher Inflation Lowers Probability of Policy Rate Cuts
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Bank of America has revised its 2026 China inflation forecasts upward, raising the Consumer Price Index projection to 0.7% from 0.1% and the Producer Price Index forecast to 0.3% from -0.7%. This adjustment is driven by three main factors: January and February data indicating a cyclical recovery in domestic demand; elevated energy price assumptions following Middle East conflicts, with Brent crude projected to average USD 77.50 per barrel in 2026; and an artificial intelligence investment cycle that bolsters metal and electronics pricing.
Energy costs are the primary driver behind the PPI upgrade, with investment recovery expected to broaden factory gate price increases in the second half. However, downstream price transmission remains limited. The mechanical link between PPI and CPI has weakened recently, as midstream and downstream industries absorb costs when consumer demand is soft. Furthermore, services comprise approximately 40% of the CPI basket, and service inflation is driven primarily by labor market conditions rather than raw material expenses.
Consumer demand is recovering gradually, and core CPI alongside service inflation is expected to rise sustainably. Based on this improved inflation outlook, Bank of America has withdrawn its previous forecast for two 10 basis-point rate cuts in 2026. The central bank now has improved policy flexibility to adopt a wait-and-see stance. If domestic demand weakens unexpectedly, the bank retains the capacity to act swiftly. The 2026 CPI forecast carries upside risk toward 1.0% if economic confidence improves more decisively.