HONG KONG (MarketWatch) -- Monetary authorities in China are likely to roll out further reductions in interest rates this year after data released Tuesday showed consumer price- increases eased for the ninth straight month while wholesale inflation dropped 3.3% in January.

"We anticipate further interest rate cuts from the [People's Bank of China] in the coming months, especially considering the recent rise in real interest rates," wrote J.P. Morgan analyst Jing Ulrich in a note emailed to reporters Tuesday.

Consumer-price inflation eased to 1% from a year earlier, cooling from 1.2% in December, and 2.4% in November, according to data released by the National Bureau of Statistics Tuesday.

Wholesale inflation, a measure of producer prices, fell to negative 3.3%, extending a month-on-month declining trend since peaking at 10.1% in August. Analysts had on average forecast wholesale inflation of negative 2.6%, according to a poll by Dow Jones Newswires.

Moody's economist Sherman Chan said the central bank will extend aid to businesses and households hit by the hard economic times through additional monetary easing "though at a milder pace than that adopted in late 2008."

In final quarter of 2008, the People's Bank cut its base lending rate by 2.16 percentage points to 5.31%. It has not made any changes this year. Money-supply growth accelerated to 17.8% in December on year, after rising 14.8% in November.

"With inflationary pressures evaporating, the central bank will see more room to loosen monetary policy," Chan said.

China' economic growth eased to 6.8% in the December-ending quarter on year, from 9% in the preceding quarter. Some economists think China's economy is currently in recession.

Merrill Lynch said Tuesday that China appears set to become the first major economy to recover from the global crisis. The broker noted that the inflation pointed to the emergence of a more benign pricing environment for manufacturers.

"The much sharper decline in PPI inflation compared to CPI inflation could improve profit margins and even boost earnings growth for a number of sectors," wrote Merrill economists headed by Ting Lu in Hong Kong.

Merrill added that recent data suggest the economy is well on its way to achieving the government's target for 8% GDP growth this year.

Still, declines in consumer prices would have been sharper if it hadn't been for resilient food prices as a winter drought ravaged part of the nation's main agricultural belt. Buoyant consumer spending over the Chinese New Year in late January, also helped underpin prices.

For the most part, the decline in producer prices had been well-flagged following sharp declines in industrial commodities such as crude oil and coal from about the middle of last year.

Consumer prices are expected to decline further in coming months before rebounding later in the year when the government's stimulus policies take effect. Many economists have predicted the fourth quarter as the likely period when China's economy will strengthen.

Standard Chartered regional economist Kelvin Lau said China's consumer price inflation rate would likely remain "pretty low" for the next three quarters before staging a "mild" rebound in the fourth quarter.

Merrill Lynch's Lu said there were few risks of sustained deflation in China this year. Prices would be supported against a backdrop of loose monetary policy, the removal of some price controls, ramped up government spending, and commodity prices that appear set to rally off lows

The broker defined deflation as a persistent decrease in the general price level of goods and services lasting for a prolonged period.

Merrill forecast the PBOC will cut interest rates by 0.81-percentage point this year and said the major risk was that the central bank could cut rates less than many expect.

Merrill's outlook is for consumer-price inflation of negative 2.6% in February, a number that may exaggerate price weakness because of the distortion caused by the spring Lunar New Year festival.

China suffered deflation for about a year ending in 2003 and for two years ending in 1999 following the Asian economic crisis.

"If we do see a prolonged period of deflation, say more than 12 months, it will make a very big difference to domestic consumption," said Standard Chartered Lau, "it will lead to changes in expectations of prices over the medium to long term."

Lau said it was unlikely China would fall into prolonged deflation this year.