(Yicai Global) June 10 -- China’s consumer price index growth on a yearly basis hit a 13-month low last month as businesses started to get back to work. Economist believe the unexpected fall has created more room for monetary policy, and the country is likely to cut the reserve requirement ratio and interest rates.

The CPI rose 2.4 percent in May from the previous month, a 0.9 percentage point fall from the same period last year and down 0.8 point from April, according to statistics released by the National Bureau of Statistics today. The producer price index, which tracks prices of industrial products, continued to drop, falling 3.7 percent last month from a year earlier because of fluctuations in international commodity prices.

The Covid-19 pandemic has been effectively brought under control in China and production and business have rebooted in an orderly manner, with market supply and demand improving and inflation falling further, said Wen Bin, chief researcher at China Minsheng Banking.

In the first five months of the year, the CPI rose 4.1 percent from a year earlier and is likely to hit this year’s 3.5 percent target. With the return to production in full swing, supply and demand are expected to remain balanced, and the price of goods will remain stable, opening up more room for monetary policy, Wen added.

Li Chao, chief economist at Zheshang Securities, predicted that the CPI will continue to head south in the second half, and the PPI will be restored in phases. The May CPI was significantly below the government’s 3.5 percent target, with the impact of inflation on the People’s Bank of China’s implementation of monetary policies weakening, the probability of a cut in the benchmark deposit rate increases.

China has no inflationary pressure given the trend of goods prices, creating room for regulation via monetary policies, said Tang Jianwei, chief researcher at Bank of Communications’ financial research center.

“Monetary policies will focus on innovating monetary policy tools for the real economy in the second half to help micro, small and medium firms and individuals hit hard by the pandemic,” Tang told Yicai Global. “The possibility of a cut in the RRR and interest rates in the second half remains, but both the frequency and scope are likely to be smaller than in the first half.”

The PBOC will create two monetary policy tools for the real economy to prevent the liquidity the bank injects into the market from running idle for arbitrage, China Minsheng’s Wen said.

“Monetary policies should step up efforts to stabilize employment and improve people’s livelihood; speed up creation of monetary policy tools for the real economy; support micro, small and medium companies; accelerate restoration of business confidence; and boost demand recovery,” Wen to Yicai Global.

Editors: Chen Juan, Peter Thomas