BEIJING China's factory gate prices fell at the fastest pace in seven years in May and quicker than forecasts, as faltering demand weighed on manufacturing and the fragile economic recovery.

As rising interests rise and inflation squeeze demand in the United States and Europe, China is by contrast battling a sharp decline in prices with factories receiving less for their products.

The producer price index (PPI) for May fell for an eighth consecutive month, down 4.6%, the National Bureau of Statistics (NBS) said. That was the fastest decline since February 2016 and bigger than the 4.3% fall in a Reuters poll.

The consumer price index (CPI) rose 0.2% year-on-year after a 0.1% rise in the previous month, missing a forecast for a 0.3% increase.

China's economy grew faster than expected in the first quarter, but recent data showed factory activity contracted and imports fell in May.

"The risk of deflation is still weighing on the economy," said Zhiwei Zhang, chief economist at Pinpoint Asset Management. "Recent economic indicators send consistent signals that the economy is cooling," he added.

The Australia dollar eased 0.2% to $0.6704, tracking a slide in the Chinese currency yuan after the CPI data.

Some economists expect the People's Bank of China (PBOC) to cut rates or release more liquidity into the financial system. The bank cut lenders' reserve requirements ratio in March.

"So far, monetary policy and fiscal policy have remained tight, along with lower income growth, so domestic demand is depressed," said Dan Wang, chief economist at Hang Seng Bank China.

China's biggest banks on Thursday said they had lowered interest rates on deposits, providing some relief for the financial sector and wider economy by easing pressure on profit margins and reducing lending costs.

Analysts have been downgrading their forecasts for economic growth for the year amid continued signs of slowing. The government has set a modest GDP growth target of around 5% for this year, after badly missing the 2022 goal.

(Reporting by Joe Cash; Editing by Sam Holmes)