SHANGHAI (Reuters) - China’s central bank will keep monetary policy flexible and adjust it appropriately according to changes in the country’s economic situation, bank Governor Yi Gang said.

FILE PHOTO - China's Central Bank Governor Yi Gang speaks during a conference in Budapest, Hungary, November 9, 2018. REUTERS/Bernadett Szabo

Yi’s comments come amid widespread expectations that the central bank will ease policy further in coming months to support China’s economic growth, which has cooled to the weakest pace since the global financial crisis.

However, some of the pressure for more immediate action may have been lifted by a weekend agreement between the United States and China for a temporary truce in their trade war to allow for further negotiations.

When an economy begins overheating, Yi said tools must be used to allow a “slow release of air” and a “soft landing”, while during times of recession or external shocks financial markets must be stabilized and public confidence shored up.

Yi made the comments in an article in the China Finance magazine, which is published by the People’s Bank of China (PBOC), to commemorate the 40th anniversary of its landmark economic reforms and opening up under former Chinese leader Deng Xiaoping.

The PBOC has already slashed banks’ reserve requirements four times this year and brought down market interest rates to relieve funding strains on cash-strapped companies.

But talk began to swirl recently that policymakers may be weighing more aggressive action to jumpstart the economy -- such as the first benchmark lending rate cut in three years -- if Washington followed through on its threat to sharply ramp up trade pressure on China at the start of the new year.

To be sure, China’s central bank has plenty of policy tools to choose from to bring down rates.

Ming Ming, a former PBOC official and head of fixed income research at Citic Securities in Beijing, said guiding the loan prime rate (LPR) lower is a “soft” option for cutting interest rates, and is more reasonable compared with adjusting benchmark interest rates.

“We believe (the authorities) will cut policy rates, such as open market operation and medium-term lending facility rates, to guide market rates lower. That will transmit to the LPR and drag lending rates lower,” he said in a note on Tuesday.

Markets are now hoping for signals on 2019 economic priorities from several key policy meetings in coming months.

The Central Economic Work Conference (CEWC) is usually held in mid-December. Key growth targets and policy goals are discussed but typically not announced until the National People’s Congress in March.

The Sino-U.S. trade agreement “suggested that the gap between the two sides is narrowing, a situation that China was also hoping to reach as it settles China’s biggest source of uncertainty. And it will set the tone for the plenum and future reform and opening,” said Chen Xingdong, chief China economist at BNP Paribas in Beijing.

Markets are now awaiting the fourth plenum of the 19th Party Congress, where the main objective is to set a general tone for the country’s development.

A rebound in the yuan currency following the trade deal -- if sustained -- could give policymakers more room for further easing, some market watchers say. Loosening policy while the yuan was under pressure from trade tensions had raised the risk of triggering capital outflows.

The yuan posted its biggest daily gain in nearly three years on Monday, firming 1 percent against the U.S. dollar as weary Chinese markets welcomed news of the trade ceasefire.

It gained another 0.4 percent on Tuesday. As of 0343 GMT the onshore spot yuan CNY=CFXS traded at 6.8565 per dollar, up more than 1,000 pips from Friday's late night closing price of 6.9590.

Chinese 10-year treasury futures for March delivery CFTH9 were up 0.3 percent at 97.060 on Tuesday morning, supported by expectations of easing.

Chinese Premier Li Keqiang on Monday reiterated confidence that Beijing will meet its annual economic growth target of around 6.5 percent this year, despite the risk of a protracted trade war with the United States.

But talk is already growing over what targets the government will set for next year, and what that may signal in terms of fiscal and monetary policy adjustments.

Some analysts believe China’s growth could cool to as low as 6 percent in 2019 if trade tensions persist, which would be the weakest pace the country has seen since 1990.