· Despite the stronger than expected January 2012 CPI inflation reading of 4.5% y/y versus Bloomberg consensus 4%, our estimate of 3.9%, and December 2011 4.1%, we expect the PBoC to cut the reserve requirement ratio by 50 bps in Q1 12 and another 50 bps in Q2 12.
· The first clean print on CPI will emerge in April 2012 in our view after the Lunar New Year (LNY) distortions dissipate from the data.
· The January data was distorted by the LNY effect impacting food prices.
· We doubt that policy makers decisions on further loosening of monetary and fiscal policies will be impacted by today’s higher than expected CPI inflation print.
· Policy makers concerns on growth, which include weak LNY retail sales and exports, are still the main drivers of the direction of macroeconomic policies in our view. We do admit that policy makers remain vigilant on the outlook for inflation.
· We maintain our core view that the risks to CPI inflation from Q2 to Q4 12 are tilted to the upside as demand side pressures pick-up and if the current upward momentum in some
commodity prices continues.
· We expect non-food CPI to remain well contained in Q1 12. The January data showed that transport, telecommunication, and residential rental prices remained well contained.
· From Q2 to Q4 12, the risks are tilted towards transport and electricity prices rising. The pass-through from past global oil price increases has remained incomplete so far.
· Core CPI inflation has continued to decelerate and we expect a bottoming by Q2 12, with the risk toward upside surprises from Q2 to Q4 12 as the economy shows signs of
rebounding.
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SEB tech team