Decline in inflation a concern for PBOC: Danske Bank

Quotes from Danske Bank:

- The People's Bank of China Saturday cut both its 1-year lending rate and 1-year deposit rate by 25bp to 5.35% and 2.50% respectively. Interestingly the PBoC's main argument for cutting interest rates was concern about the recent decline in inflation and possible risk of deflation.

- So far macroeconomic policy in China has been guided broadly by a floor for GDP growth (7.5% in 2014) and a ceiling for inflation (3.5% in 2014). However, it has been unclear to what degree there is a lower bound for the inflation acceptable for the Chinese government and how low a possible lower bound is. 

- CPI inflation in January declined to 0.8% y/y from 1.5% y/y in December driven in our view mainly by distortions from the timing of the Chinese New Year public holiday. We expect inflation to rebound to close to 2% y/y in February before normalizing around 1.5% y/y in March.