Consumer inflation in China dropped to 3.2 per cent from a year ago in February, down from 4.5 per cent in January and the lowest since June 2010.
With stubbornly high inflation now apparently under control, Beijing is expected to shift its attention to supporting growth in the world’s second-largest economy, which is showing signs of slowing more than expected.
The Chinese government identified tackling inflation as its main task last year and, through a combination of successive interest rate increases and extensions in the reserve requirement for banks, it managed to bring rapid price rises under control by the fourth quarter.
Inflation peaked at an annualised rate of 6.5 per cent in July last year and has been steadily moderating since then.
But officials remain wary of a possible resurgence, especially in politically sensitive food prices, and this is likely to limit the extent of monetary easing this year unless growth collapses.
On Friday, Yan Qingmin, assistant chairman at the China Banking Regulatory Commission, told reporters that China still faced price pressures and would have to wait until the middle of the year to determine whether inflation really had been beaten.
The data released on Friday provide the first clear picture of the state of the economy since the start of the year because both January and February’s figures were skewed by the Chinese Lunar New Year holiday, which fell in late January this year but in February last year.
During the holiday most businesses in the country shut down for two weeks and prices rise as families rush to buy presents and food for the celebration.
The combined annual rate of consumer inflation for January and February was 3.9 per cent and this provides a far more accurate picture of the underlying inflation pressures because it compensates for the seasonal effect.
At that level, inflation remains higher than the one-year benchmark deposit rate of 3.5 per cent, which means Chinese savers are still losing money on their bank deposits because of negative real interest rates.
“Policymakers will be cautious about declaring victory over inflation, particularly given the recent pick-up in global oil prices,” said Brian Jackson, an economist at the Royal Bank of Canada in Hong Kong. “As a result, we do not expect a big shift in policy settings in the near term, with any move to ease liquidity conditions likely to take the form of further cuts in banks’ reserve requirements rather than lower policy rates.”
Ft.com