China's inflation rate is likely to fall below 2 percent in July due to the base effect, giving authorities more room to beef up monetary supply to support growth, according to the latest bank estimations.
The consumer price index (CPI), a key gauge of inflation, will rise 1.7 percent year on year in July, slower than the 2.2-percent growth seen in June, the Bank of Communications and the Industrial Bank said in their monthly economic data forecast reports.
Both banks attributed the easing inflation to the base effect. The CPI growth rate hit a 37-month high of 6.5 percent in July last year before gradually retreating as China's economy slowed for eight quarters running.
The inflation rate will remain at around 2 percent throughout the third quarter if no new factors emerge to drive prices up, the financial research center of Bank of Communications projected.
Food prices, which account for nearly one-third of the prices used to calculate China's CPI, may stay flat in July compared with June, as rain and flooding affected vegetable production in many places in a traditionally peak season of supply, it said.
Non-food prices will increase about 0.1 percent in July from June on rising prices in transport, telecommunications, entertainment and housing, Industrial Bank noted in its report.
The central bank is likely to further reduce the reserve requirement ratio (RRR), the money that lenders should set aside in reserves, in August to shore up the softening economy, said Lu Zhengwei, chief economist with Industrial Bank.
China's central bank has cut the RRR three times since November. It also slashed benchmark interest rates for the first time since December 2008 in June and further reduced the rates earlier this month.