Central bank has options on inflation

China's consumer price index (CPI) rose by 1.4 percent year-on-year in November, hitting a five-year low, the National Bureau of Statistics announced Wednesday.

This latest inflation figure has again stoked expectations that the government will cut interest rates and reserve requirement ratios (RRRs). Some analysts even expect three rounds of interest rate cuts and six rounds of RRR reductions within the next 12 months.

Sometimes forecasts do come true. For instance, when CPI growth remained unchanged from September to October, many experts began speculating on the possibility of an interest rate cut, which is exactly what the central bank delivered in November.

It seems reasonable to expect an interest rate cut when CPI data signal economic deceleration, yet this doesn't mean the central bank has to act every time when consumer inflation wavers.

First of all, an interest rate cut may do little to boost demand given sluggishness in the domestic and international economies. Secondly, the domestic banking system is not lacking liquidity at the moment. It would be better for regulators to make good use of surplus funds instead of injecting more cash into the market. Thirdly, even if liquidity were in short supply, interest rate and RRR cuts are not the only way to address such a problem. The central bank could also use short-term monetary tools like reverse repos to adjust liquidity.