PBoC to continue with easing, modest CPI increase unlikely to alter trend

A prolonged easing campaign by the PBoC beginning in late 2014, has boosted credit, but has yet to result in substantial price increases. Data released early on Monday showed that China's producer prices fell less than expected in March while consumer inflation stabilised.

The consumer price index (CPI) rose 2.3 percent y/y in Mar, slightly less than consensus at 2.5 percent, unchanged from February's reading. CPI was down 0.4 percent m/m. The producer price index (PPI), meanwhile, declined y/y for the 49th consecutive month, down 4.3 percent, but at a slower rate of decline than in February. A Reuters poll forecast a 4.6 percent decline, after February's 4.9 percent y/y slide. PPI rose 0.5 percent m/m.

Economists believe further monetary easing from the People's Bank of China is likely in the form of cuts to interest rates and the reserve requirement ratio as the extended PPI slump tightens liquidity in the mainland's debt-laden corporate sector. Some said the pace of easing might now be slower.

"We still expect full-year CPI to be comfortably below the 3 percent target set by the PBOC this year which means there should be ample room for monetary easing if needed." said Julia Wang, Economist at HSBC.