ING expects China’s inflation trend to have only a small impact on People’s Bank of China (PBOC) policy in 2026. It expects the inflation target announced at the Two Sessions in March to be around 2% year-on-year, unchanged from 2025. ING forecasts CPI inflation will again come in below the 2% target, as it has in recent years. It notes the target has mainly been used to limit inflation on the upside, not to lift inflation from low levels.

Inflation Target Likely Not A Constraint

Because of this, ING expects a CPI miss on the downside will not limit monetary policy. It says the PBOC is more likely to focus on broader economic conditions and the possible impact on banks and markets. ING also says recent soft domestic data supports further easing. It sees room for an initial move in the first half of 2026, including a 10bp rate cut and a 50bp Reserve Requirement Ratio (RRR) cut. With inflation likely to undershoot the 2% target again, ING sees few limits on monetary policy. Signs of a weak finish to 2025, along with January CPI of just 0.4%, strengthen the case for the PBOC to ease. The market should watch the Two Sessions in March for confirmation of economic targets, but the overall direction appears to be more support. This outlook could be positive for Chinese equities after a difficult 2025. Traders may consider buying call options on major stock indices such as the FTSE China A50 or the Hang Seng Index. This positions for a rebound that could be supported by extra liquidity in the first half of the year.

Potential Trades Around Policy Easing

A rate cut would likely put downward pressure on the yuan. ING expects USD/CNY to move higher as the interest rate gap between China and the US widens. Buying call options on USD/CNY could be an appealing way to position for a weaker yuan in the coming weeks. For interest-rate traders, the chance of both a 10bp rate cut and a 50bp RRR cut supports a long position in government bonds. One way to do this is by buying Chinese government bond futures. A similar move happened after the last RRR cut in mid-2025, when bond prices rallied sharply and rewarded traders who were positioned early. Even before any decision, expectations of a policy move can lift short-term volatility. This can make options straddles on currency pairs or equity indices useful for trading a rise in market swings ahead of key PBOC announcements. Keep in mind that implied volatility often drops quickly once the policy decision is announced. Create your live VT Markets account and start trading now.

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