HONG KONG (Reuters) - China's yuan fell to its lowest level against the US dollar since October 2012 and to within a hair's breadth of the lower limit of its daily trading range on Monday after the central bank cut its benchmark interest rate during the weekend.

Traders expect the Chinese currency to fall further in the coming months due to a sluggish economy, as the central bank is exected to ease monetary policy further as inflation remains lows.

"The concern over the lower headline inflation profile amidst high real interest rate is precisely one of the reasons why we think the yuan may need to weaken further," said Heng Koon How, a senior currency strategist at Credit Suisse's Private Banking and Wealth Management department in Singapore.

The People's Bank of China set the midpoint at 6.1513 per US dollar prior to market open, weaker than the previous fix 6.1475. It was the weakest level since Nov 6, 2014.

The spot market opened at 6.2730 per dollar, 34 pips weaker than the previous close and 1.98 per cent weaker than the midpoint. The yuan traded in a very tight range between 6.2733 and 6.2727 in morning trade.

The spot rate is currently allowed to trade with a range 2 per cent above or below the official fixing on any given day.

The PBOC is unlikely to signal an outright depreciation of the yuan, but may guide the daily fixing rate gradually lower, Heng said.

The offshore yuan was trading 0.27 per cent weaker than the onshore spot at 6.29 per dollar.