The global economic crisis pushed China into deflation in early 2009, despite the loose monetary policy adopted by the People's Bank of China (PBoC). China's central bank cut the policy lending rate and reserve requirements for banks, but the primary tool of monetary policy in China remains the credit channel. New lending surged in H1 2009, expanding the monetary base (M2) more than 25% y/y, but the velocity of money remained limited. As the slack in the economy narrowed, deflation first eased and then prices began accelerating. Inflationary pressures should continue to prompt monetary tightening from Chinese authorities, particularly because core inflation is also rising.
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