Surging inflation won't stop monetary easing in China - analysts

SHANGHAI (Reuters) - China's strongest consumer inflation in nearly eight years won't deter the central bank from cutting a key interest rate next week, as slowing economic growth is a bigger concern for policymakers, traders and fund managers said.

The People's Bank of China (PBOC) will likely lower the Loan Prime Rate (LPR) next Wednesday, for the third time since it introduced the benchmark in August. The rate on the one-year fixing <CNYLPR1Y=CFXS> now stands at 4.2% while the five-year <CNYLPR5Y=CFXS> is at 4.85%.

Driven by soaring pork prices from the spread of African Swine Fever, China's consumer inflation rose past the government's target of around 3% in October to its fastest pace in almost eight years, posing a dilemma for the PBOC.

China's economic growth slipped to its slowest pace in nearly three decades in the third quarter, pressured by slowing global demand and a bruising trade war with the United States.

Eleven traders and bond fund managers, and about a dozen analysts and economists, told Reuters they expected the LPR to be lowered this month.

A majority of them believe the cut will be a marginal 5 basis points, in line with a 5 basis point cut in a medium-term lending facility (MLF) last week and in keeping with a gradual rather than aggressive loosening.

"We are at a typical stagflation period," said a Shanghai-based bond fund manager.

"But there remains a constraint on easing in the short term as the headline consumer price index is unlikely to fall below 3% before the first half of next year."

In October, the PBOC kept LPR rates unchanged, an unexpected move that suggested Beijing was keen to avoid overly loosening monetary policy for fear it may push up already-high debt levels across the economy.

A Reuters poll in mid-October had most respondents forecasting the rate would be cut.

Some say this month is different, following a central bank decision last week to lower the interest rate on its MLF for the first time since early 2016. And it again made a surprise injection on Friday.

Some see the move as a sign the central bank is turning more proactive and is looking to ease investor worries that higher inflation will prevent it from delivering fresh stimulus.

"The PBOC is likely to go slower on monetary easing than we had earlier expected," said Ho Woei Chen, economist at UOB Group in Singapore.

"Growth concerns will dominate, but again, the government will balance this with long-term financial stability."

If LPR rates come down, that could "help the PBOC out of trouble", the Shanghai-based fund manager said.

(Reporting by Winni Zhou and John Ruwitch; Editing by Jacqueline Wong)