January inflation at 5-year low, prompting further policy easing

China's consumer inflation slowed to the lowest level in more than five years, fuelling market hopes of further easing in monetary policies to support the faltering economy.

The consumer price index (CPI), the main gauge of inflation, grew 0.8 percent year on year in January, the National Bureau of Statistics (NBS) said Tuesday. The rise marked the slowest pace since November 2009, when the rate settled at 0.6 percent.

Food prices, which account for nearly one-third of China's CPI weighting, increased 1.1 percent year on year in January. On a monthly basis, consumer prices edged up 0.3 percent.

The NBS attributed tempering growth to retreating food prices due to warmer weather during the period. A bigger comparison base last year, and slumping global oil prices also helped drag down the price levels.

Meanwhile, China's producer price index (PPI), which measures wholesale inflation, plunged 4.3 percent year on year in January, marking the 35th straight month of decline that pointed to continued weak market demand.

HSBC chief China economist Qu Hongbin said the weaker than expected inflation data showed China's deflationary pressure was on rise.

Minsheng Securities forecast inflation would stay between 1 percent and 2 percent for a while as economic headwinds would continue to dampen aggregate demand.

"China's current growth supporting policies can hardly offset the impact of the ongoing property downturn and slowing private investment," the firm noted in a report.

China's economy grew 7.4 percent in 2014, the weakest annual expansion in 24 years, and a string of economic indicators for the new year, including manufacturing and trade data, all suggested continued weakness.

The purchasing managers' index, a main gauge of manufacturing activity, fell below 50 for the first time since October 2012 in January, and data over the weekend showed exports fell by 3.2 percent and imports plunged 19.7 percent for the month.

Despite the subdued economic strength, Chinese policymakers have moved more cautiously than the market expected. In the latest move to support growth, the central bank last week decided to lower reserve requirement ratio (RRR), the minimum level of reserves banks must hold, by 50 basis points from Feb 5, the first universal RRR cut since May 2012.

This followed an unexpected move to slash interest rates last November, also the first cut in more than two years.

But given the little improvements in economic activity, analysts widely expect more frequent and drastic policy moves to counter the slowdown.

Considering deflation and financial risks, China will further ease monetary policies, and last week's RRR cut will not be the end of this round of easing, according to Minsheng.

Bob Liu, an analyst at China International Capital Corp (CICC), believes that one interest rate reduction and three RRR cuts are needed to stimulate growth.