Morgan Stanley Expects Further Stimulus From PBOC Following China's Weak April

Analysts at Morgan Stanley recently took an in-depth look at food prices in China and released a report on their outlook for the rest of 2015 based on the most recent numbers. According to the report, Morgan Stanley sees continuing deflation risk in Chinese food prices in the near future.

April CPI Mostly In-Line

The April Consumer Price Index (CPI) numbers out of China indicated a 1.5 percent year-over-year inflation rate, slightly below consensus expectations of 1.6 percent. Higher meat and vegetable prices pushed flood inflation rates to up 2.7 percent year-over-year in April, ahead of the 2.3 percent increase reported in March.

Although pork prices were down 0.8 percent month-over month in April month-over-month, they climbed 8.3 percent year-over-year.

Non-food inflation gained 0.9 percent year-over-year in April.

Sluggish PPI Numbers

Producer Price Index (PPI) numbers out of China in April continued to lag as well, deflating 4.6 year-over-year. The deflation rate exceeded both consensus expectations of 4.5 percent and Morgan Stanley’s projection of 4.3 percent.

Policy Implications

Analysts believe the single biggest driving factor behind the sluggish CPI numbers is weak domestic demand in China. They predict that the disappointing numbers will push the People’s Bank of China (BPOC) to undergo another round of stimulus.

“Though PPI deflation eased slightly in sequential terms, helped by the rise of several commodity prices in April, we believe risks from overall lowflation likely remain in place and warrant further monetary easing,” analysts explain in the report.

Morgan Stanley expects the PBOC will soon cut both the benchmark interest rate in China and the reserve requirement ratio in an attempt to boost domestic demand.