Inflation at lowest level in 15 months

Mainland inflation eased to its lowest level in 15 months last month, giving policymakers more room to stimulate growth.

The consumer price index (CPI) was 4.1 per cent last month, slightly lower than the 4.2 per cent posted in November but marginally higher than economists' consensus forecast of 4 per cent as slower growth in non-food items such as property cushioned a strong rebound in food prices, including vegetables.

But the overall rate for 2011 was 5.4 per cent, the highest in four years and well above the government's target of 4 per cent. Inflation in 2010 was 3.3 per cent.

Some economists expect the slight easing means Beijing could move more quickly to loosen monetary policy through cuts in banks' reserve requirement ratio.

Citigroup economists say the first cut could come before the Lunar New Year on January 23. HSBC economist Qu Hongbin said the cut was 'a matter of weeks' away.

'The December [drop] is encouraging,' BBVA chief economist for Asia Stephen Schwartz said. 'It confirms the moderating trend continues, which should pave the way for policy easing to stimulate growth.'

Officials have placed economic growth ahead of taming inflation as the No 1 objective this year.

International Monetary Fund first deputy managing director David Lipton yesterday ruled out 'a hard landing' for the world's second-largest economy despite the impact of economic slowdown in the United States and European Union.

He said mainland economic growth was moderating from a 'somewhat a very rapid rate that it experienced last year'.

Citigroup economists do not think Beijing will introduce drastic stimulus policies before macro-economic indicators deteriorate further.

They expect the CPI will hover around 4 per cent in the next few months, particularly during the peak consumption season of the Lunar New Year.

They predict food prices will rise further this month, after climbing 9.1 per cent last month on tight supply and jumping 8.8 per cent in November. Inflation for non-food items was 1.9 per cent last month after being 2.2 per cent in November, due to declining property prices.

The producer price index was 1.7 per cent in December compared with 2.7 per cent November, signalling sluggish manufacturing activity as a result of weakened demand in the United States and European Union, the mainland's top two markets.

Mizuho Securities chief economist Shen Jianguang estimates the CPI will stay around 4 per cent this year as a result of 'aggressive' cuts in the reserve requirement ratio, minimum wage rises and potential quantitative easing in developed countries.

Economists widely expect the reserve requirement ratio will be lowered by 150-200 basis points in the first half of this year after the 50 basis point reduction in November.

This is despite the fact that the People's Bank of China has suspended bill auctions and conducted reverse-repurchase contracts to pump extra cash into the short-term market in a bid to meet an expected surge in demand before the New Year.

After the November cut, banks extended 640.5 billion yuan (HK$738.9 billion) in new loans last month, up from 562.2 billion yuan, while annual growth in the broad M2 money supply accelerated to a faster-than-expected 13.6 per cent, from November's 12.7 per cent.