Subdued inflation and uncertain external demand call for more easing measures

Summary

Today, headline CPI inflation came out at 1.6% y/y in October, flat with the outturn in the previous month. In the meantime, PPI dipped further to -2.2% y/y from -1.8% y/y in September, marking the longest disinflation span of 32 months in history. The weak consumer price is mainly due to weak domestic demand and the fall in global commodity prices while the producer price has been afflicted by the overcapacity problems in some upstream industries. Separately, both exports and imports, which were reported last Saturday, significantly moderated from their readings of the last month, pointing to increasing uncertainties of external demand. A combination of subdue inflation and uncertain external demand suggest that the authorities need to beef up their efforts to easing monetary policies in support of growth. In this respect, we expect that the authorities will stick to its “targeted easing” commitment in the rest of the year while will reinstate the cuts in required reserve ratio by up to four times with 25 bps each time.

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