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Roach Says China Has Scope for More Rate Cuts as Inflation Slows

China has scope for further reductions in interest rates as growth and inflation slow in the world’s second-largest economy, according to Stephen Roach, former non-executive chairman for Morgan Stanley in Asia.

“The People’s Bank of China has plenty of ammunition left,” Roach, a professor at Yale University in New Haven, Connecticut, said in an interview with Bloomberg Television. “There’s plenty of room for additional easing, and actually their interest rates are pretty high in inflation-adjusted, or real terms.”

China cut rates last night for the second time in four weeks and ahead of a report due July 9 that may show the slowest inflation in 29 months, according to a Bloomberg News survey. The move came as the European Central Bank also reduced borrowing costs and the Bank of England boosted an asset- purchase program, highlighting concern that worldwide demand is fading.

“There is weakness around the world, in Europe of course,” and the U.S. economy is soft, Roach said. “The ECB is pretty much out of ammunition.”

The ECB yesterday reduced its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero, with President Mario Draghi saying the cuts may have only a “muted” economic impact.

China’s gross domestic product probably grew 7.8 percent in the second quarter from a year earlier, down from 8.1 percent in the three months through March, a Bloomberg News survey showed before a government report due July 13.

“You’ll see a slower gross domestic product number in the second quarter,” Roach said. “But I think it’ll still be a Chinese economy that’s on a soft-landing and not a hard-landing trajectory, so I don’t think this is a sign of panic. I think it’s a measured cut to prevent inflation-adjusted, or real interest rates, from rising sharply in a slower inflationary climate.”

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net; Susan Li in Hong Kong at sli31@bloomberg.net.

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net

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