Chinese inflation fell short of expectations in June, prompting ING analysts to argue that this trend supports the need for the People’s Bank of China (PBOC) to further ease monetary policy, likely through interest rate cuts.
In June, the Chinese consumer price index (CPI) inflation decreased from the previous month, with the annual figure showing weaker-than-expected growth. This decline occurred as consumer spending remained subdued due to ongoing concerns about the Chinese economy.
The softness in consumer inflation provided additional motivation for the PBOC to further reduce interest rates, following the bank’s reduction of the reserve requirement ratio (RRR) in February. However, ING analysts noted that the effectiveness of RRR cuts was diminishing.
“We continue to see real interest rates as too high for the current state of the economy and believe the economy would benefit more from rate cuts. While we believe the PBOC has likely held back on cuts to avoid adding to RMB depreciation pressure, we expect to see 1-2 rate cuts in the second half of the year,” ING analysts wrote in a note.
ING analysts also mentioned that any interest rate cuts by the U.S. Federal Reserve could encourage further monetary easing in China.
Over the past two years, the PBOC has reduced its benchmark loan prime rate to record lows. However, this move has only provided limited support to the economy, leaving investors calling for more supportive measures.
On a positive note, Chinese producer price index (PPI) inflation showed some improvement in June. PPI inflation contracted by 0.8% for the month, marking its slowest decline since January 2023.
While this figure indicated some improvement in manufacturing activity—one of China’s primary economic drivers—it still suggested that Chinese deflation remained prevalent.
Any interest rate cuts would likely benefit Chinese stocks, which have experienced significant losses over the past two months as sentiment towards the country deteriorated. The government is expected to announce more stimulus measures during the Chinese Communist Party’s Third Plenum later in July.
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