Markets rethink policy outlook

Markets have scaled back their expectations for policy tightening in China as senior officials have made clear that they see no need for a major policy shift. The government’s stance is based in part on the view that inflation will soon level out. But policymakers also seem to fear that rapid tightening would threaten what they view as a fragile economic situation. This means that monetary conditions will be supportive for financial markets. But, as long as the inflation and policy outlook is uncertain, volatility is set to continue.