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China's weaker June inflation prompts economists to speculate on interest rate cuts

Another interest rate cut makes sense for China: Commerzbank
Why was China June CPI lower than expected?
UBS WM: Beijing has some room to ease further

Soft China inflation data released at the weekend has sparked speculation the economic giant may join the ranks of various central banks in cutting interest rates to boost growth.

Figures from the National Bureau of Statistics released on Sunday showed under-target consumer inflation, with the consumer price index (CPI) rising 1.9 percent in June from a year ago primarily due to lower food prices. Economists had forecast a 1.8 percent rise, after the country logged a 2.0 percent increase in May.

With the CPI under the official 3 percent inflation target, the People's Bank of China (PBOC) will have "more leeway to stimulate the economy" to help it achieve its 6.5 percent growth target, said Hao Zhou, Commerzbank's senior emerging market economist for Asia.

"It makes more sense for China to cut interest rates," Zhou told CNBC's "Squawk Box" on Monday.

"China is talking about supply-side reforms but I think China needs to stimulate on the demand side," he added.

China's food service industry is a key part of the mainland's service sector.
Getty Images

Nomura's chief economists said, meanwhile, that although the CPI may spike temporarily in the months ahead due to heavy flooding in South China that would increase food costs, monetary policy was likely to remain accommodative.

"Such a spike should be short-lived. The temporary spike in CPI and PPI (Producer Price Index) is unlikely to pose a meaningful constraint on monetary policy easing, as we expect the PBOC to see through the temporary supply shocks and maintain an accommodative policy stance to curb downward pressure on growth," they said in a note on Sunday.

The house expects three more cuts to the bank reserve requirement ratio (RRR) - the amount of captial banks are required to hold - and one interest rate cut in the second half of 2016.

The PBOC last cut interest rates on Oct. 23, for the seventh time since late 2014. The RRR was last cut in February, the fifth time in 12 months.

China's leaders have set an economic growth target of 6.5 percent to 7 percent for 2016, after the economy expanded 6.9 percent last year, its slowest pace in a quarter of a century.

The world's second-largest economy is set to release its second-quarter GDP data on July 15.

- Reuters contributed to this report.

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