China’s headline inflation eases in January, further decline may trigger monetary policy adjustment

China’s headline PPI inflation came in a positive number in January, but the prices of producer goods has actually eased to 0.1 percent on a year-on-year basis in January from December’s 0.9 percent. Today’s inflation data bodes ill for industrial utilization rate and the profit outlook of local Chinese enterprises and the manufacturers of producer goods.

“We will be keeping a close eye on the PPI inflation print over the next few months. If the price decline extends into the headline PPI inflation numbers for an extended period, it could trigger further monetary policy adjustment from the authorities”, noted ANZ in a research report.

Nevertheless, China has not yet slipped into widespread deflation. The core inflation rose to 1.9 percent year-on-year in January from December’s pace of 1.8 percent. The service inflation rebounded to 2.4 percent. Meanwhile, the headline consumer price inflation slowed to a two-year low of 1.7 percent year-on-year in January, owing to food prices that dropped to 1.9 percent year-on-year from 2.5 percent in December, partially because of a fall in pork prices.

An absence of upward prices pressures will cloud the interest rate outlook of China. The benchmark lending rate is no longer a ‘policy rate’ following interest rate liberalization a few years ago. The People’s Bank of China has already lowered the medium-term lending facility rate in January and injected plenty of liquidity into the system. Several measures such as the reserve requirement ratio cuts have already influenced the market rate.

“We believe the PBoC may consider the front end (ie 7-day reverse repo rate) rate cut if the US Fed is also considering reducing fed funds rate”, added ANZ.

At 11:00 GMT the FxWirePro's Hourly Strength Index of Chinese Yuan was highly bearish at -132.191, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 27.7923 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex