Inflation Fall Confirms Scope For Rate Cuts

The economic indicators we are expecting to provide the context for this week’s surprise quarter percentage point cut in interest rates by the People’s Bank of China are starting to come in. Among the first to arrive is consumer price inflation. At 3% for May, it is at its slowest monthly growth rate in two years, and down from April’s 3.4%, resuming the decline from last July’s 6.5% peak. The producer price index fell to 1.4% in May, confirming the global weakening of demand.

Both falls provide the headroom to cut rates without rekindling inflationary expectations. The cut in retail gasoline prices also announced this week was insurance. At least one more round of cuts to the banks’ reserve ratios followed by another modest interest rate cut seems likely for later this year.

Update: Industrial output in May ticked up by 0.3% from April’s 9.3% growth rate while fixed-asset investment, up 20.1% year-on-year, showed its third consecutive month of slowing growth and retail sales grew by 13.8%, down from April’s 14.1%. In short, plenty of evidence to support the shift of policy from reducing inflation to promoting growth. Zhuang Jian, an economist with the Asia Development Bank, summed up policymakers’ dilemma when he told state media:

Relying on investment to pull growth will have an immediate effect, but it will have negative repurcussions if not used rightly, while the consumption driver, though carries long-term value, is slow to boost economy.

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One response to “Inflation Fall Confirms Scope For Rate Cuts

  1. Pingback: China’s May Trade Data Surprise Baffles | China Bystander

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