the environment framing China’s monetary policy has changed dramatically over the past year. The slowdown in economic growth has been only gradual, from 7.7% in 2013 to 7.4% in 2014, but that is not the most pressing concern. In announcing the rate cut, the PBoC emphasised that it was focused on the sharp drop in inflation, which has led to an increase in real funding costs (see chart). The average of consumer price inflation has fallen by 170 basis points since the start of the fourth quarter, while average lending rates have declined by just 20 basis points since then, estimates Wang Tao of UBS, a Swiss bank.