"We must adhere to policy stability as a priority, and stick to implementing normal monetary policy," Yi Gang told a financial forum in Shanghai on Thursday, forecasting this year's inflation at below 2%.
"Keeping interest rates at a proper level is conducive to the stable and healthy development of the markets," the People's Bank of China (PBOC) governor said.
Yi said that China's interest rates, though higher than major economies, are still relatively low among developing and emerging economies.
Yi also reiterated that the central bank will keep the yuan exchange rate basically stable, while vowing to further improve China's exchange rate mechanism.
China has taken a series of measures recently to rein in rapid rise in the yuan, which hit a three-year high against the dollar on the back of China's robust economic recovery and attractive yields.
Data released on Wednesday showed China's May factory gate prices rose at their fastest annual pace in over 12 years due to surging commodity prices.
Yi said this was largely the result of a low base last year, adding that there is controversy over how long this year's rapid rise in global inflation - fueled by surges in oil and commodity prices - would last.
China also reported consumer price data on Wednesay, which showed a 1.3% rise for May - the biggest year-on-year increase in eight months.
But it was still well below the government's official target of around 3%, and Yi said he expected average annual inflation to be below 2% this year.
"Of course, there are uncertainties in the overseas pandemic situation, economic recovery and macro policies, so we should be on alert toward both inflationary and deflationary pressure in many aspects," he said.
The potential growth rate of China's economy is slowing, and future expansion must be driven by rising productivity and reforms, rather than investment of capital and labor, Yi said, citing an aging population.
China's monetary policy must pay attention to the impact of structural changes on price stability, he added.
In an aging society, people tend to save more and consume less, curbing inflation, but a green transformation could push up inflation due to rising costs of using fossil fuels, Yi said.
The central bank governor said the PBOC will take a number of measures to help China achieve its carbon neutrality goals, including harmonising standards for green finance with the European Union, setting up a disclosure system for climate-related information, and incentivising capital support to green sectors.
(Reporting by Andrew Galbraith, Kevin Yao and Samuel Shen; Editing by Muralikumar Anantharaman, Ana Nicolaci da Costa & Simon Cameron-Moore)