China inflation falls as economy slows

City A.M. Reporter
China's annual consumer inflation slowed sharply to a 20-month low of 3.2 per cent in February, staying comfortably within Beijing's 2012 target and giving policymakers ample room to further loosen monetary policy to support flagging growth.

Easing price pressures will allow the People's Bank of China (PBOC) to continue reducing level of the cash commercial banks must hold as reserves to keep money supply steady in the face of volatile foreign capital inflows, supporting growth without causing an inflationary spike, analysts say.

Fixed asset investment is also likely to be shown cooling in the month as consumer spending held steady.

"The inflation story is over," economists at HSBC said in a note to clients. "This leaves the PBOC with fewer excuses not to step up its easing efforts to support growth -- especially given the sharp slowdown in exports so far this year."

A Reuters poll in December showed economists expected 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 to 20.5 percent following a 50 bps cut in November.

Economists polled by Reuters had forecast China's consumer inflation to run at 3.4 per cent in February from a year ago, well within Beijing's 2012 inflation target of 4 percent.

The slowdown in February's consumer inflation was mirrored by producer prices. The producer price index was shown flat on the year in February, below market expectations for prices to have quickened 0.2 per cent.