Along with the People's Bank of China's July 5 decision to lower key interest rates, the market expects the consumer price index (CPI) for June to reflect a faster fall, to as low as 2%. This suggests that China may be moving beyond the era of negative interest rates.
The country's National Bureau of Statistics is scheduled to publish June's CPI, as well as the producer price index, on July 9. May's CPI sharply fell to 3%, and food prices continued to drop. A Bank of Communications report forecast June's CPI will drop to around 2.4%. China has been concerned about inflation since the CPI topped 6% last summer.
That the average value of the CPI in the third quarter of this year will come to around 2%, Cao Yuanzheng, chief economist at Bank of China. This would mean that the era of real negative interest rates — when the rate of inflation outstrips that of saving — has come to an end in China.
Investment bank Morgan Stanley has said that the central bank's interest rate cut was made because the speed of reducing inflation has been faster than expected. Morgan Stanley also expects the bank to launch more measures to ease liquidity.
Commodity prices are continuing to fall and the growth rate in prices in June is expected to fall to 2.5%, according to Guo Tianyong, director of a banking research center at Central University of Finance and Economics in Beijing. The People's Bank of China said it would cut the one-year renminbi lending rate by 31 basis points, to 6%, effective July 6, expecting borrowing to become more attractive.
Andy Xie, an independent economist based in Shanghai, said the global stock market should rise as a result of the cut. But the reduction will have only a small effect given global economic uncertainty and market concern over a hard landing in China's once-blistering economy. Xie says China should turn its export-reliant economy into one that is driven by strong domestic demand.