Soft Chinese inflation furthers the case for PBOC rate cuts- ING

Investing.com-- Chinese inflation underwhelmed in June, with ING analysts stating that the trend made a compelling case for the People’s Bank of China to ease monetary policy further, likely through interest rate cuts.

Chinese consumer price index inflation shrank in June from the prior month, with the annual figure showing weaker than expected growth. This came as consumer spending remained largely depressed amid persistent concerns over the Chinese economy. 

Soft consumer inflation presented more impetus for the PBOC to further cut interest rates, after the bank had in February trimmed its reserve requirement ratio. But ING analysts argued that cuts in the RRR were showing diminishing returns and effectiveness. 

“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 in order 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 said that any interest rate cuts by the U.S. Federal Reserve could also invite more monetary easing in China.

The PBOC had slashed its benchmark loan prime rate to record lows over the past two years. But the move has so far only provided little support to the economy, and has left investors clamoring for more supportive measures. 

Still, Chinese producer price index inflation read somewhat better for June. PPI inflation shrank 0.8% in the month- its slowest decline since January 2023. 

But while the figure did signal some improvement in manufacturing activity, which is among China’s biggest economic engines, it still showed Chinese deflation remained largely in play. 

Any interest rate cuts bode well for Chinese stocks, which were nursing steep losses over the past two months as sentiment towards the country soured. The government is expected to unveil more stimulus measures during the Chinese Communist Party's Third Plenum later in July.