China warns slowdown could worsen, does not rule out rate cut

China's central bank warned the country's economic slowdown could worsen and the risk of deflation was high, in its latest quarterly report, while not ruling out further interest rate cuts. China's economy will continue "stable and rapid growth" as government stimulus measures kick in but the global economic crisis has hit hard, the People's Bank of China said in its fourth quarter monetary policy report. "(We will) appropriately use various tools, including adjustment of interest rates and banks' reserve requirement ratios, to ensure reasonable monetary and credit growth," the bank said. China cut interest rates five times in the period from September to December, with the benchmark one-year lending rate now standing at 5.31 percent, while the one-year deposit rate is 2.25 percent. The export-dependent Chinese economy , the world's third-largest, expanded by nine percent last year, the first time in six years that it posted single-digit growth. "External demand is shrinking, some sectors have overcapacity, enterprises face operating difficulties and urban unemployment is rising, while the downward pressure on economic growth is increasing," the central bank said. Weak demand means deflation is likely in the short term, but in the medium-to-long term massive injections of liquidity by central banks around the world could fan inflation, it said in the report released late Monday. China's consumer price index, the main gauge of inflation, was up only 1.0 percent in January while producer prices, which measure trends at the wholesale level, fell 3.3 percent, prompting economists to warn deflation was imminent. Deflation is a situation when a continued fall in prices encourages people to postpone buying products as they expect to get a better bargain later, but that in turn only serves to further slow the economy.

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