China: Lower inflation keeps prospects of PBoC easing - UOB

FXStreet reports that UOB Group’s economist Ho Woei Chen, CFA, assessed the latest inflation data in China vs. the probability of extra easing by the PBoC.

“Both China’s Consumer Price Index (CPI) and Producer Price Index (PPI) continued to ease and were below consensus forecasts in May. This provides more room for monetary easing while PPI deflation pointed to the need for the government to continue with its counter-cyclical measures.”

“Year-to-date, China’s CPI averaged 4.1% y/y. Monthly CPI inflation is likely to remain under 3% in the next few months, partly due to a higher base of comparison in late-2019 due to the surge in pork prices. For the full-year, inflation is likely to be close to the target of 3.5% set at the National People's Congress (NPC).”

“We expect China to keep its policy measures to ensure that domestic rates remain low to support the credit channels in the 2H20 economic recovery.”

“Easing inflation will continue to provide some room for further cuts to the LPR though this is likely to remain moderate. We have factored in another 30 bps cut to the 1Y LPR to 3.55% by end-4Q20. We also see room for another one to two rounds of RRR cut in the next 3-6 months to reduce funding costs and increase the capacity for banks to expand credit and absorb the RMB1 trillion of special treasury bonds issuance.”