(Bloomberg) -- The People’s Bank of China warned inflation may accelerate as overall demand in the economy picks up, suggesting the scope for further monetary policy easing may be limited. 

The central bank “will pay serious attention to the underlying possibility of rising inflation, especially changes in the demand side,” it said in its quarterly monetary policy report released late Wednesday. At the same time, the PBOC said it will increase support for the economy and keep liquidity reasonably ample.

Analysts said the comments suggest the central bank could be shifting its focus to preventing economic risks and may refrain from adding more stimulus. Founder Securities Co. noted the PBOC omitted a pledge that it would “make good use of monetary policy tools’ quantitative and structural functions” that it has been making since late last year.

That “may signal a lower possibility of a interest rate cut and reserve requirement ratio cut by the end of this year,” Zhang Wei, a fixed-income analyst at Founder Securities, said in a report.

The PBOC cited disruptions to global energy supply and the fast growth in M2 money supply in China as potential risks that may lead to higher inflation. It also sees the possibility that consumer demand may improve after stringent Covid controls were adjusted, which would increase structural inflation pressure in the short term, according to the report.

“The loosest period of the liquidity environment may have passed as the room for further easing will be limited under the risk preventing focus,” Sinolink Securities analysts including Zhao Wei wrote in a note Thursday.

China’s inflation has been relatively subdued this year compared with soaring prices globally, largely due to the drag from control Covid controls on consumer and business activity. The PBOC has cut its key interest rates twice this year and kept monetary policy relatively loose while other major central banks have tightened.

The PBOC this week sought to maintain ample cash levels in the financial system as latest economic data showed a worse-than-expected slowdown in October. With Covid outbreaks spreading at the fastest pace since April, pressure is building on Beijing to provide further support after making major tweaks to Covid controls and introducing rescue measures for the property sector.

Goldman Sachs Group Inc. economists expect China to gradually relax the Covid Zero policy from the second quarter of 2023, saying that “could boost consumption notably and increase inflationary pressures modestly.” However, overall inflation will likely remain mild as pork supply may start to recover and the labor market is still weak, they said in a note.

On the yuan, the PBOC said the currency has “solid foundation” to maintain stability around “reasonable and equilibrium” levels, and reiterated its stance to smooth major swings in the exchange rate. 

The yuan weakened sharply against the dollar this year as China’s monetary policy diverged with the US and other major economies. The currency has rallied in November along with a global revival of risk sentiment, and as a slew of policy shifts by Beijing supported the currency’s outlook.  

--With assistance from Fran Wang.

(Updates with additional details.)

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