The prospect of more monetary stimulus in China edged closer today with a soft inflation reading from the world's second largest economy.
Price rises, as measured on the consumer price index (CPI), slipped back from 1.9 to 1.8 per cent in July - significantly off the People's Bank of China's (PBOC) three per cent target. Factory prices, as measured by the producer prices index (PPI), actually came in stronger than expectations at minus 1.7 per cent but have been negative for more than four years.
Chinese investment bank Haitong said the PBOC would cut interest rates to help prop up demand. Nevertheless, it said there was a "need for the government to step in on the fiscal side to keep the economy ticking over until we get towards the end of this two to three year restructuring process."
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The PBOC is currently in the middle of a 15 trillion yuan debt swap deal, but Haitong said this was not stoking inflation because "a significant proportion of this money is festering on state-owned-enterprises' balance sheets."
Interest rates are currently at 4.35 per cent in China and bond yields hit a seven-month low on the prospect of a future cut today. With the US Federal Reserve eyeing up a second rate rise since the financial crisis, a rate cut in China could put even more upwards pressure on the US dollar.