China to hold easing course even as US, Japan raise rates, PBOC says

China has reaffirmed its commitment to an accommodative monetary policy even as the United States, Japan and other major economies face growing pressure to raise benchmark interest rates again. The People's Bank of China said the current tightening moves abroad do not represent the kind of abrupt policy reversal seen in the past, and their impact on global financial markets will likely be more limited.

The central bank flagged several risks that could stoke global inflation: rising international oil prices stemming from the war in Iran, tariffs imposed by the Trump administration, and higher semiconductor and electricity prices driven by the AI investment boom. It also warned that rising interest rates could weigh on equity markets buoyed by ample liquidity and government bond markets.

In its second-quarter 2026 monetary policy implementation report released Wednesday, the PBOC assessed that "the scale of this monetary policy adjustment is relatively moderate, and its impact may be smaller than in the past," referring to tightening moves by the US, Japan and other major central banks.

A fresh wave of monetary tightening has emerged among major central banks in recent months. The EU and Japan raised their benchmark interest rates in June. The Federal Reserve held rates steady in both June and July but has maintained a hawkish tone, emphasizing price stability.

At the July Federal Open Market Committee meeting, three members called for a 0.25 percentage point rate increase. US consumer prices rose 3.4 percent in July — still well above the Fed's 2 percent target — leaving the possibility of further rate hikes on the table.

The PBOC drew a clear distinction between the current tightening cycle and the sharp rate increases of the past. In previous episodes, central banks launched massive monetary easing — including during the COVID-19 pandemic — then pivoted quickly to tightening to rein in surging prices. The PBOC said the current adjustments do not amount to a fundamental reversal of policy direction.

The bank also noted that diverging economic conditions across countries make it unlikely that major central banks will move in the same direction at the same time. It added that a recent easing of the energy price shock triggered by the war in Iran reduces the likelihood of aggressive tightening.

"When rapid tightening followed large-scale accommodative monetary policy in the past, the impact on markets was pronounced," the PBOC said. It added that the current rate increases are more closely tied to liquidity adjustments than to a sweeping shift in macroeconomic policy.

Still, the bank cautioned that global inflation risks have not disappeared.

It cited the war in Iran as a key driver of higher international oil and raw materials prices. While energy prices have retreated from recent peaks, ongoing uncertainty in the Middle East and around the Strait of Hormuz could reignite inflationary pressure, the PBOC said.

The AI investment boom was also identified as a new inflation variable. Surging investment in AI data centers and related industries has increased demand for semiconductors and electricity, pushing up prices for related products and services, the bank said.

The Trump administration's tariff policy was also cited as a factor adding to price pressures. Tariffs on imports raise costs for businesses, which are then passed on to consumers, complicating inflation management for central banks worldwide, the PBOC said.

On the potential impact of major-economy rate hikes on global financial markets, the PBOC struck a cautious note. "Attention should be paid to the uncertainty surrounding how these rate increases will affect global financial markets," it said, flagging rising government bond yields as a key risk factor.

The bank also raised the possibility that global equity markets, which have climbed on the back of ample liquidity, could face a correction as rates rise. Higher government bond yields in major economies would reduce the relative appeal of risk assets and increase borrowing costs for companies, it said.

China, meanwhile, intends to maintain a monetary policy stance that diverges from those of other major economies. The PBOC said it would "continue to implement an appropriately accommodative monetary policy," pledging to deploy a full range of monetary tools and make timely adjustments to keep liquidity ample.

That stance aligns with the economic policy direction for the second half of the year confirmed by the Chinese Communist Party's Politburo at its meeting on July 30. At that session, the leadership agreed to sustain "more proactive fiscal policy and appropriately accommodative monetary policy."

The signal is that China will prioritize economic stimulus even as rate-hike risks mount in the US, Japan and elsewhere. Beijing made clear it will remain alert to capital flows and financial market volatility stemming from tightening abroad, but will not use those pressures as a reason to abandon its accommodative monetary policy stance.