China May inflation cools faster than expected

China's annual consumer inflation cooled faster than expected to 3% in May, data showed on Saturday, helping explain the central bank's move to cut interest rates this week for the first time since the depths of the 2008-09 financial crisis.

In a sign that price pressures may stay benign, the National Bureau of Statistics said producer prices also declined more than forecast by 1.4% from a year ago, compared with estimates for a 1.1% decline.

That marked the third straight month of producer price deflation.

"Price pressures eased in May and the easing could accelerate in coming months. This supports the central bank's move to cut interest rates," said Zhang Yongjun, economist at China Center for International Economic Exchange (CCIEE), a top government think tank.

Economists polled by Reuters had forecast inflation to fall to 3.2% in May. From a month ago, consumer inflation fell 0.3% in May, while producer inflation eased 0.4%.

"June inflation is very likely to dip below 3% and probably cool further towards the year-end," Zhang said. "We cannot rule out the possibility of more rate cuts, and the reserve requirement ratio should be cut more frequently."

The price data comes just two days after China's central bank cut lending and saving rates by 25 basis points to put a floor beneath slackening economic growth.

The surprise move stirred concern that the central bank had acted to pre-empt a poor showing from China's monthly data deluge due later at 0530 GMT. If the data indeed disappoints, talk that Beijing may do more to lift growth would likely build.

A Reuters poll of analysts in May showed China's economy is forecast to grow just 8.2% this year, its slowest in 13 years.

Analysts also think China will deliver its weakest quarter of growth in three years in the second quarter at 7.9%, its sixth straight quarter of slowing growth.

Even before Thursday's rate cut, China's central bank had lowered banks' reserve requirements twice this year by a total of 100 basis points to loosen credit conditions.

But commercial banks are still required to lock a fifth of their deposits with the central bank, a level some economists argue is too high, especially as Europe edges closer to a financial precipice.

And with China drawing closer to its once-a-decade leadership change, the government is desperate for the economy to grow steadily to provide enough jobs.

Premier Wen Jiabao had vowed to keep China's economy growing at a "relatively fast" pace, and the government has promised to accelerate planned infrastructure investment.

Still, analysts predict China will not unveil another massive 4 trillion yuan stimulus package, as it did during the 2008-09 crisis, leaving a frothy house market and a mountain of debt in its wake.