Central bank may cut interest rate before July

China's central bank may cut the interest rate in the second and third quarters this year, as the economies in the EU and US slow down further while domestic inflation pressure gradually eases, economists said on Saturday.

According to research co-sponsored by Xiamen University and the National University of Singapore, China's monetary policy is very likely to see an adjustment in the first half of 2012.

"We expect the People's Bank of China to cut the interest rate twice in the second and third quarters, by 25 basis points each time," said Chen Kang, professor of economics at the Lee Kuan Yew School of Public Policy at the National University of Singapore.

After those two cuts, China's benchmark interest rate will drop from the current 6.56 percent to 6.06 percent.

The central bank said on Feb 18 that it will cut the reserve requirement ratio, or the proportion of money that lenders must set aside as reserve, by 50 basis points effective Feb 24. It followed a cut in the reserve requirement in December by 50 basis points, which was the first since December 2008.

"As the external demand weakens, the renminbi further appreciates and the domestic economy slows down, we believe the inflation pressure will gradually ease this year," said Li Wenfu, a professor with Xiamen University.

According to the National Bureau of Statistics, the Consumer Price Index, a main gauge of inflation, stood at 4.5 percent year-on-year in January. It rose 5.4 percent in 2011 from a year earlier, the bureau said.

"Based on our research, China's CPI will fall to 3.33 percent in 2012, down 2.18 percentage points from 2011, which provides leeway for the central bank to loosen its monetary policy as the economy further slows down," Li added.

Zhang Ping, deputy head of the economic research institution of the Chinese Academy of Social Sciences, said the CPI will fall further in February, probably below 3.5 percent.

"With a meaningful rebound for domestic demand not in sight, external weakness is starting to bite, adding more downside risks to growth," said Qu Hongbin, chief economist for China and the co-head of Asian economic research at HSBC, urging the central bank to further loosen its policies after it cut the RRR for banks for the first time this year.

Due to last year's surging inflation, China's real interest rates have been negative for the past 23 months. China's CPI reached a 37-month high of 6.5 percent in July 2011.

"Given China's negative real interest rate, there should be a cut in the loan interest rate but no more in the deposit interest rate," said Zhang Shuguang, an economist with the Unirule Institute of Economics.