(Bloomberg) -- China’s consumer prices barely grew in April, while borrowing slumped, providing further evidence the economy’s recovery is waning and fueling expectations of more central bank stimulus.

Consumer inflation weakened to a two-year low of 0.1% in April, the National Bureau of Statistics said Thursday, as food and energy costs eased. The figures were partly affected by the low base of comparison from last year. Producer prices fell 3.6%, largely due to lower commodity costs. 

Separately, data from the People’s Bank of China showed credit and new loans were much worse than expected in April as consumers and businesses curbed their borrowing.

“China’s credit data came in well below estimates, reinforcing the concerns over the sustainability of post-Covid recovery,” said Zhou Hao, chief economist at Guotai Junan International Holdings Ltd. Overall growth momentum “has been slowing significantly,” he said. 

Expectations of policy easing has been growing, and a “policy rate cut looks imminent in the second quarter,” he added.

China’s economic growth accelerated to a one-year high in the first quarter after pandemic restrictions were dropped, led by stronger consumers spending on travel and shopping. Recent data has been more mixed though, with manufacturing activity contracting in April and imports plunging.

Thursday’s figures added to the gloom. Core CPI, which excludes volatile food and energy costs, was unchanged at 0.7%, suggesting there’s very little demand-driven inflation in the economy. Food inflation weakened to 0.4% in April from 2.4% in March.

“There is still a big gap between demand and its pre-pandemic trend,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. “We do not think domestic demand can improve significantly in the near-term,” estimating it will take three to five years to rebound.

The yield on 10-year government bonds fell 1 basis point to 2.7% as of 5:47 p.m. local time, set for the lowest level since November.

The PBOC’s figures showed lending weakened across the board. Growth of M2, the broadest measure of money supply, moderated to 12.4% year-on-year in April, the slowest pace seen this year.

The PBOC has refrained from cutting interest rates this year although it lowered the reserve requirement ratio for banks in March, providing lenders with more cash to give out loans. Credit growth spiked in January-March, helping drive the economy’s debt ratio to a record high.

China’s top political leaders have so far stuck to their pro-growth policy stance this year, suggesting they’ll keep monetary and fiscal policy supportive. Still, they’re wary of flooding the financial system with cheap liquidity. 

What Bloomberg Economics Says

The surprising slowdown in China’s credit sends yet another signal that the housing rout isn’t over. A sharp drop in household loans made aggregate social financing and new yuan loans shrink more than the usual seasonal drop in April. The message is clear: the economy needs more support. The data strengthen our conviction that the People’s Bank of China will cut its key rate soon. This is needed to show its commitment to easing and improve confidence – key to sustaining the recovery.

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David Qu, China economist

Economists say the PBOC has scope to cut interest rates if needed. The Federal Reserve signaled a potential pause in interest rate hikes recently and latest data showed US inflation cooled somewhat in April.

Chinese banks may also have room to lower lending rates going forward after some of them cut their deposit rates recently.

The PBOC probably won’t take any immediate action, said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc.

There’s “less urgency for large-scale monetary easing” in the short term, he said. “Securing income growth and improving consumer confidence remain key policy priorities for delivering a more sustainable consumption recovery,” he said.

(Updates with credit figures.)

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