Tim Condon, Chief Economist at ING, suggests that the Chinese deep PPI deflation is squeezing cash flows in heavily leveraged corporates and they expect the PBOC to cut policy interest rates by 25bp before month end. Key Quotes “CPI inflation hit a 19-month high of 2.3% YoY in February (consensus 1.8%), up from 1.8% in January on higher food prices. Food prices typically jump in the Lunar New Year month but this year’s 6.7% MoM food component spike was the steepest since 2008. As in Taiwan, an outsized 29.9% increase in the fresh vegetables subcomponent stood out. The food component spike put the year-over-year increase at 7.3%, a 4-year high (prior 4.1%). Non-food inflation slowed to 1.0% YoY in February from 1.2% in January. Core inflation slowed to 1.3% from 1.5%. February PPI inflation was in line at -4.9% YoY, up from -5.3% in January. We expect the 18% MoM drop in global crude prices in January to sustain deep – c.5% – PPI deflation until global oil prices stabilize long enough for a low-base effect to kick in, which would be toward the end of the year if oil prices stay close to January’s average (US$33.96 for Brent. Severe winter weather in North Asia has disrupted food supplies and caused a food price spike. The supply shock will be transitory but assuming the shock doesn’t intensify, its impact on headline CPI inflation will persist until it moves into the base of comparison a year from now. We are reviewing our 1.5% 2016 inflation forecast for upward revision (consensus 1.6%). We consider 3% the PBOC’s inflation red line and we don’t think today’s data will limit the PBOC’s room to ease policy. Deep PPI deflation squeezes cash flows in China’s highly-leveraged corporates and calls for lower interest rates. We expect the PBOC to cut policy interest rates by 25bp before month.” For more information, read our latest forex news.