China central bank warns of unstable inflation outlook, low prices

BEIJING (Reuters) - China's central bank warned of deflationary pressure in the world's second-largest economy on Wednesday as it forecast subdued consumer prices for the year and a challenging growth outlook.

But the People's Bank of China (PBOC) also tried to allay concerns about China's stuttering economy, saying it can expand around 7 percent this year, in line with the government's economic growth target.

In its 2014 annual report that was published online, the PBOC reiterated that it would keep monetary policy prudent, and would make timely adjustments - or "fine-tuning" - to ensure conditions are "appropriate".

"Price expectations are not very stable, and the price level is expected to remain volatile at a low level," the PBOC wrote.

A sagging housing market and slowing growth in exports, domestic consumption and investment have dragged on China's economy in the past year, despite a flurry of monetary policy loosening.

Economic growth slipped to 7 percent in the first three months of this year, an impressive rate by global standards but the worst in China in six years. The economy is widely expected to grow around 7 percent this year, the weakest pace that China has seen in a quarter of a century.

Lukewarm economic activity has also capped China's inflation pressure. Annual consumer inflation ran at 1.5 percent in April, well short of the government's 2015 inflation target of 3 percent.

The central bank, which has cut interest rates three times in six months, did not comment directly on the outlook for interest rates or banks' reserve requirements.

But it restated China's plans to expand its M2 money supply by around 12 percent this year compared with 2014.

That may reassure some investors who are worried about slowing growth in China's M2 money supply. Growth in the measure in April hit the lowest since records began in 1998, raising concerns that slackening credit growth may further crimp investment.

(Reporting by Koh Gui Qing; Editing by Shri Navaratnam)