Weaker June inflation data may prompt more stimulus from Beijing

Lower consumer inflation and continuing decline in producer price index could prompt Beijing to launch stronger growth measures

PUBLISHED : Wednesday, 09 July, 2014, 10:45am
UPDATED : Thursday, 10 July, 2014, 2:48am

China's consumer inflation cooled slightly more than expected in June, pointing to lingering weakness in the economy which could prompt Beijing to launch further stimulus measures to shore up growth.

The consumer price index (CPI) rose 2.3 per cent in June from a year earlier, down from 2.5 per cent in May, the National Bureau of Statistics said yesterday.

The producer price index (PPI) dropped 1.1 per cent in its 28th straight month of decline, versus a market consensus for a fall of 1 per cent, signalling that demand in the domestic economy remained lukewarm.

"The weak inflation data leaves more scope for Beijing to step up use of targeted measures and even opens the opportunity window for blanket easing policy, such as an interest rate cut, to support economic growth," said Wang Jin, an analyst at Guotai Junan Securities in Shanghai.

Most economists believe Beijing will roll out fresh stimulus measures in coming months to ensure 2015 economic growth meets its target of 7.5 per cent, but they are divided whether it will stick to small-scale measures used so far or take more aggressive steps such as interest rate cuts or a nation-wide reduction in bank reserves.

Policymakers are reluctant to announce a massive stimulus programme like the one adopted during the 2008-09 global financial crisis, which fuelled inflation.

"Subdued inflation means monetary policy will have plenty of room to ease further over the coming months," Julia Wang, an economist at HSBC said in a note to clients. "We think the central bank will likely continue to do so in a targeted manner."

The weaker June inflation reading was mainly due to lower pork and vegetable prices. The CPI fell 0.1 per cent in June from May, versus a forecast of no change in monthly prices. In the first half of this year, average consumer inflation was 2.3 per cent, way below the official ceiling of 3.5 per cent set by the government at the start of the year.

With inflation clearly not a threat for now, the government and central bank have the scope to loosen policies further to bolster the economy.

"Further monetary policy easing across the board will still be needed to help lift confidence in China's economy," said ANZ economists in a research note.

ANZ believes Beijing will reduce reserve requirement ratios for all of the country's banks in the third quarter. So far, it has relaxed the requirement only for banks which are significant lenders to small companies and the farming sector.

Premier Li Keqiang said earlier this week that economic growth quickened in the second quarter from the previous three months. But he added the economy still faces downward pressure.

The central bank said on Monday it would use a mix of monetary tools to keep overall liquidity at an appropriate level.