Central Bank to Cut Benchmark Interest Rates and Reserve Requirement Ratio to Help Growth

Cnetral Bank to Cut Benchmark Interest Rates and Reserve Requirement Ratio to Help GrowthIn efforts to help banks prop up growth, China’s central bank is planning to cut the benchmark interest rates and the reserve requirement ratio. China should continue to loose its monetary policy and push ahead with reforms as latest data is indicating mild recovery of consumer prices, low producer prices and a lower than expected manufacturing activity.

China’s producer price index a measure of costs for goods at factory gate have dropped by 5.2 percent year on year in 2015 has widened from 1.9 percent slip in 2014. Then in December alone the producer price index fell 5.9 percent marking a 46th straight month of decline. Meanwhile the consumer price index a gauge for inflation increased 1.4 year on year and on a monthly basis, the December consumer price index when up 0.5 percent compared to the previous month. Both the PPI and CPI are related and as the producer price index reflects prices in production, consumer price index reflects the price at the point of consumption. Data on both indexes were much lower than the previous levels, which shows a rising deflation pressure that is caused by a slow demand. But a slightly higher CPI reading have eased concerns on the deflation in the production sector will pass on the consumer sector.

The Caixin General China Manufacturing Purchasing Managers Index, which indicates manufacturing activity have edged down to 48.2 in December compared to the 48.6 percent. PMI reading was at the lowest since September, which suggested a weak client demand posing a major growth risk for 2016. Readings above 50 indicated expansion and reading below 50 represented contraction. Weighed down by sluggish demand, weak exports and flagging investment the economy expanded by 6.9 percent year on year in the third quarter in 2015.

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