China inflation eases to 15-month low, policy easing eyed

Thu Jan 12, 2012 6:21am EST
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By Aileen Wang and Nick Edwards

BEIJING (Reuters) - China's inflation rate eased to a 15-month low in December, though sticky food prices are a reminder of the risks the government is weighing as it tilts policy towards boosting growth as internal and external demand for Chinese goods falters.

Consumer price inflation of 4.1 percent, just ahead of market expectations of 4.0 percent, extended an easing trend of the last five months to reinforce the view of many that the central bank is poised to ease monetary policy.

The annual rate of producer price inflation, at 1.7 percent, came in just below forecasts of 1.8 percent, underscoring the potential for downside surprises for corporate China as a deteriorating global backdrop knocks demand for goods from the factories of the world's second largest economy.

"China is more worried about an economic slowdown now and will continue the policy easing cycle," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

"Loan supply will increase in the first three months and China will cut interest rates probably in March. We expect GDP growth will slow down rapidly to 7.5 percent in the first quarter."

Three sources familiar with government plans told Reuters on Wednesday that China has set a target of 8 trillion yuan ($1.27 trillion) in new local-currency bank loans and 14 percent growth in broad M2 money supply for 2012, implying a further loosening of PBOC policy to support the economy as growth loses steam and inflation cools.

Beijing cut the ratio of cash banks are required to hold as reserves by 50 basis points in November to 21 percent, the first such cut in three years, in a move to boost corporate credit lines and help firms cushion falling demand at home and abroad.

Analysts in a recent poll by Reuters said they anticipated RRR cuts of at least 200 basis points through the course of 2012. Many expect to see a 50 bps cut from the People's Bank of China before the Lunar New Year holidays next week.   Continued...