Lower CPI May Lead to Cuts in Interest Rate

China's slower inflation leaves the central bank with more room to cut interest rates, possibly one more before the Lunar New Year, to shore up a slowing economy, economists said Thursday.

China's consumer price index, the main gauge of inflation, rose by 1.2 percent year on year in December, down from November's 2.4-percent growth. The December inflation is at its lowest level since July 2006. It is also the third straight monthly drop.

Inflation for the whole of 2008 was 5.9 percent.

China's economy grew a slower-than-expected 6.8 percent in the fourth quarter, meaning that growth for 2008 came in at 9 percent.

The threat of inflation was a worry for Chinese authorities in the first half of 2008. However, inflation tamed in the second half as global financial markets were routed and international commodity prices corrected. Now, economic growth is the top priority for authorities as inflation wanes.

Ken Peng, a Citibank economist, said Thursday that he cut the forecast on China's economy this year from 8.2 percent to 7.6 percent, after touching a low of 6.3 percent in the first half.

Sherman Chan, a Moody's Economy.com economist, said modest CPI growth in recent months has allowed the People's Bank of China to continue with its monetary easing as lower interest rates will help to soothe a debt burden, and support consumption and investment.

"Following the release of the disappointing December quarter GDP numbers, it is a possibility that the central bank will announce another round of interest rate cuts to boost sentiment ahead of the week-long Lunar New Year," Chan said.

Standard Chartered Bank said Thursday that it expected another round of rate cuts of 130 basis points in the first half of the year.

The central bank has cut the interest rate five times since September. The key one-year lending rate now stands at 5.31 percent.