According to Bank of Communications, China's consumer prices will likely fall in the second half of the year, trimming growth of the consumer price index to 4% by the year's end.
The bank forecast the rise of CPI, the main gauge of inflation, would be controlled at around 5.2% from a year earlier this year. The report attributed the weakening inflation mainly to tighter liquidity, slower economic growth, lower international commodity prices and adequate grain supplies.
However, the bank's chief economist Mr Lian Ping said that "There is limited room for moderation in inflation this year and long-term pressure of price increases still exist.”
He said that China still faces imported inflation as crude oil prices will probably stay high as well as long term pressure of price increases due to higher labor costs and material costs.
China's inflation escalated to the highest level in three years in June with the CPI jumping 6.4% year on year, well above the government's target of 4 percent for this year.
The report added that CPI's growth may ease to 3 percent in the middle of next year if no sudden factors emerge both at home and abroad.
The report also predicted the country's economy would expand by around9.5 percent for the year, with little risk of a hard landing.
China may lift banks' reserve requirement ratio another once or twice this year, with 0.5 percentage points each, the report said, adding that chances of interest rates hikes would be slim.
The report added that foreign exchange reserves will hit USD 3.5 trillion by the end of the year, and the value of the yuan will appreciate by 5% against the US dollar this year.