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China inflation at 3.2 percent, hits 20-month low
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  • China inflation at 3.2 percent, hits 20-month low

China inflation at 3.2 percent, hits 20-month low

FP Archives • December 20, 2014, 08:52:18 IST
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Analysts say abating price pressures give Beijing space to loosen policy and reduce the amount of cash commercial banks must hold as reserves at the central bank.

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China inflation at 3.2 percent, hits 20-month low

Beijing: China’s annual rate of consumer inflation slowed sharply to a 20-month low of 3.2 percent in February, comfortably within Beijing’s 2012 target of 4 percent, giving policymakers room to further loosen monetary policy to support slowing growth.

Analysts say abating price pressures give Beijing space to loosen policy and reduce the amount of cash commercial banks must hold as reserves at the central bank.

[caption id=“attachment_238623” align=“alignleft” width=“380” caption=“Retail sales meanwhile are forecast to have grown 17.4 percent in February from a year earlier.”] ![](https://images.firstpost.com/wp-content/uploads/2012/03/inflation_growth.jpg "inflation_growth") [/caption]

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That view is likely to be further reinforced later with more data expected to show factory output fell back to August 2009 levels, while fixed asset investment also cooled and consumer spending held steady.

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“The latest CPI number is mainly because of the dissipation of the Chinese New Year effect. Prices came down after the holiday, especially food prices,” said Kevin Lai, economist at Daiwa in Hong Kong.

“That supports our view that there should be more policy relaxation.”

Investors remain tense after tremors triggered in global financial markets this week when Beijing cut its 2012 growth forecast to an eight-year low of 7.5 percent, a move made in part to make space for economic reform, but which sparked fresh fears of an abrupt slowdown – a so-called “hard landing”.

“People want to stress-test that hard-landing scenario for China,” Tim Condon, head of Asian economic research at ING in Singapore, told Reuters ahead of Friday’s slew of data releases. “But they always soft-land.”

Condon said he expected the world’s No. 2 economy to grow at least 8.5 percent this year, a level that “certainly qualifies as a soft-landing”.

Economists polled by Reuters had forecast China’s consumer inflation to run at 3.4 percent in February compared with a year ago. Producer price inflation was flat on the year in February, slower than market expectations for a 0.2 percent reading.

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A Reuters poll in December showed economists expect Beijing to lower banks’ required reserve ratios (RRR) by 200 basis points in 2012. The central bank cut the RRR by 50 bps in February after cutting 50 bps off the ratio in November.

But widespread expectations for easier policy have not fuelled bets for an outright interest rate cut. In contrast, Brazil slashed its interest rates by a surprisingly large 75 bps on Thursday to support economic recovery and restrain a strong currency that is stifling its industry sector.

Barring a spike in world commodity prices, analysts say China’s inflation should stay muted for all of 2012 as high comparison figures a year ago force food inflation to slow.

Economists estimate food prices represent 30 percent of China’s consumer price index, the composition of which is kept secret.

Friday’s flurry of data, which should highlight the slowdown under way in China, also includes the first set of hard numbers of the year for industrial output, fixed asset investment and retail sales. They will combine data held back from January because of the heavy distortions caused by the Lunar New Year holidays.

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Fixed asset investment, industrial output and retail sales numbers are scheduled for publication at 0530 GMT.

Factory output may underscore the downside risks, with economists forecasting growth of 12.3 percent from a year ago, the weakest since August 2009 when the world was still shuddering from the global financial crisis.

Fixed asset investment, which accounted for 54 percent of China’s economic growth in 2011, is forecast to have grown 20 percent in the first two months.

That would be its lowest level since December 2002’s 17.4 percent, but an encouraging sign for policymakers keen to cut dependence on investment spending for growth, which generates both over-capacity and speculative bubbles.

Retail sales meanwhile are forecast to have grown 17.4 percent in February from a year earlier.

Reuters

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