China is stepping up policy easing, as warranted by recent weak monetary and economic data – see previous post. The three-month repo rate this week fell to its lowest level since March 2011, almost converging with the officially-set one-year deposit rate, of 3.5% – see first chart.
The easing process should be facilitated by better inflation news. Chinese food prices usually fall into mid-year but the decline in 2012 has been larger than in 2011, judging from weekly statistics – second chart. CPI food inflation may subside from an annual 7.0% in April to below 5%, cutting the headline CPI rate from 3.4% to 2.75% or lower (based on the one-third weighting of food in the basket and assuming non-food inflation remains at the current 1.7%).
Policy-makers are likely to wish to avoid a consumption-sapping rise in real interest rates, so a fall in inflation to well below the 3.5% one-year deposit rate could trigger an early downward adjustment in the spectrum of official rates.