repo rate

Indian inflation still falling Inflation in May fell further and is now only just above the mid-point of the Reserve Bank of India's 2-6% target range. We don't think inflation will fall much further, but this still means real policy rates are high, and that the RBI can start to think about reversing some of its tightening as early as 4Q23.   Further falls in inflation At 4.25%YoY, India's May inflation figures were close to expectations (consensus 4.31%, INGf 4.27%) but are nonetheless a welcome sight for policymakers and households alike. Inflation has fallen a long way from its 7.8%YoY peak in 2022. But although we may get a further month of falls in June, this may be as low as inflation gets for a while - unless we see some more moderation in the monthly run-rate. The CPI index has risen by 0.5% MoM in the last two months and if this persists, it will take inflation back up towards 5%YoY by the year-end. It will require a slowdown in the pace of CPI increase to between 0.3-0.4% MoM keep inflation close to the middle of the RBI target range. This, and the fact that core inflation (ex-food and beverages, fuel and light) has only fallen to 5.0%YoY means that is still too early to say the inflation fight has been won.   Inflation, policy rates and real rates   Real policy rates high But even if further proof may be needed before declaring "job-done" on inflation, at 6.5%, the gap between the policy repo rate and current inflation is high, and that means that the RBI's tightening should be having the desired dampening effect on the economy and inflation. It is too soon to be looking for the RBI to cut the repo rate. But rate cuts before the year-end are still possible. Rate cuts this year would be more likely if we were to see concrete signs that monthly inflation had eased, core rates continued to fall, or that the economy was showing some more obvious signs of a slowdown. So the next few months of data will be important. We are currently pencilling in 50bp of easing by the RBI by the end of 4Q23. This is earlier than the consensus of forecasters. Though we may see the RBI adopting a neutral stance on policy at its next meeting on 10 August as a first step towards actual easing.

The British pound has strengthened its leadership in the G10 currency race thanks to the U.S. employment report. The increase of 209,000 jobs in June disappointed USD supporters, causing GBP/USD quotes to soar to the highest level since April 2022. However, it failed to consolidate at that level as the unemployment rate dropped to 3.6% and average wages accelerated to 4.4%, indicating that the Federal Reserve still has a lot of work ahead. The Bank of England also faces challenges. Wage growth in the United Kingdom is outpacing that of the United States. Bloomberg experts forecast a 7.1% increase in May.   The current values, along with sustained elevated inflation at 8.7%, are perceived by companies as a greater incentive for price increases than the BoE's optimistic forecasts of CPI slowdown. BoE Governor Andrew Bailey and his colleagues are determined to prevent inflation from solidifying at elevated levels, but their actions could lead to a recession. Indeed, the short-term market expects the repo rate to reach 6.5% by March 2024. Such a high borrowing cost could risk a recession. Additionally, the yield curve inversion signals an impending downturn.     At first glance, the pound is at a turning point: the projected 150 basis points increase in borrowing costs could trigger a GDP contraction. Markets generally perceive this negatively, as was the case with the U.S. dollar at the turn of 2022–2023, when its quotes were falling. However, it's important to remember that in any currency pair, there are two currencies. The current success of GBP/USD is only partially related to expectations of a repo rate increase to 6.5%.   It's also influenced by some weakening of the U.S. dollar against major global currencies. Some Forex experts believe that the most aggressive monetary restriction by the Federal Reserve in decades will eventually worsen the health of the U.S. economy. Meanwhile, Bloomberg experts predict a slowdown in U.S. consumer prices to 3.1% in June, causing the USD index to decline. The pound faces a test with the release of UK labor market data by July 14. Alongside the previously mentioned wage growth of 7.1%, Bloomberg experts forecast a slowdown in employment from +250,000 to +158,000.   According to Pantheon Macroeconomics, this change will not be sufficient to stop the Bank of England. The repo rate hike toward 6.5% will continue. Considering that markets were anticipating 5.3% a month ago, the pound's successes are logical.     In my opinion, investors have been somewhat excessive in selling the U.S. dollar based on mixed U.S. employment statistics. This vulnerability makes sterling positions vulnerable. Technically, on the daily GBP/USD chart, a reversal pattern like a Double Bottom may form, or an upward trend may resume. In the first case, we sell the pair on a breakthrough of the pivot level at 1.2785. In the second case, on the contrary, we buy it upon a new local high at 1.285.  

Russia The Russian central bank is expected to hike the key rate by 50 basis points on Friday, taking it back to 8%. This comes as inflationary pressures are building and the rouble has been falling against the dollar. It hit its lowest level since March last year, recently, which is also more than 10% below its pre-invasion levels.   South Africa The SARB is expected to leave its repo rate unchanged next week at 8.25% after what has been a very aggressive tightening cycle. It’s risen 4.75% since September 2021 but with inflation now close to target – fresh data for June will be released a day earlier on Wednesday – the time to pause may have arrived. Of course, a nasty shock from the CPI could change that.   Turkey The CBRT will announce its latest interest rate decision on Thursday and another wide range of forecasts are likely ahead of the event. The central bank broke away from the unconventional policy approach adopted prior to the election and almost immediately abandoned after, so a large hike is likely on the cards. But the new CBRT Governor was more conservative than many expected at the last meeting and could be again this time. The lira remains near record lows though so the pressure is on.    Switzerland No major releases or events next week.   

India: RBI holds repo rate steady Not one of the 42 economists forecasting this Reserve Bank of India (RBI) meeting expected any change in the repurchase rate, and the RBI didn't disappoint. Things could get more interesting next month as food-price inflation surges.   Viewing the world through tomato-tinted glasses Although next week's inflation data for the July period will likely show Indian inflation surging above 8%YoY, the Reserve Bank of India left the policy repo rate unchanged at 6.5%.  There are some good reasons for that. Firstly, the coming inflation surge owes very considerably to tomato prices. Sure, other prices have also risen, but back-to-back monthly 100%+ increases in the price of tomatoes in June and July are doing all the damage on the upside.  The cause of these tomato-price surges? This year's Monsoon started late, with a drier than usual June but wetter than normal July. However, the average rainfall over this entire period has been close to normal. What seems to have undone things is the erratic nature of the rainfall, with some areas experiencing much more rain than normal, while for other areas, it has been much drier. Either extreme will mess up the growing season and lead to shortages and food price rises, which is what seems to have happened   Monsoon anomalies   What goes up... The good news here is that such seasonal shortages tend to be just that - seasonal. This will pass - unless there are further seasonal anomalies, which of course are becoming more common these days thanks to climate change.  Assuming that normality is resumed over the coming months, then we can expect prices to slowly subside and return to something a bit more normal over the coming months. So what is a big contributor to inflation currently, can turn into a similar-sized drag over the coming months.  We expect Indian inflation to peak in August at over 8.5%YoY before drifting back down through the end of the year. And while this is unlikely to require any offsetting rate action from the RBI, it may make it harder for them to begin easing rates as soon as we had previously thought. That now looks more likely to be a story for 2024.     

TRY: Will 250bp of CBT tightening be enough? The Central Bank of Turkey (CBT) meets today to set interest rates. In focus will be the pace at which monetary policy is tightened as new central bank governor Hafize Gaye Erkan pursues more orthodox monetary policy. So far, it is fair to say that the pace of policy tightening over recent months (900bp) has disappointed market expectations. And another 250bp rate hike to 20% in the one-week repo today would still leave real rates deeply in negative territory given inflation is running at close to 50%. As ING's Chief Economist Muhammet Mercan writes in his detailed preview of the meeting, the more modest tightening can perhaps be explained by the central bank looking at a variety of adjustments in the unorthodox tools and quantitative tightening to complement the rate hikes. There is also some speculation that the pace of rate hikes could possibly quicken given three newly appointed members to the Monetary Policy Committee. What does this all mean for the Turkish lira? While 35% implied yield through the three-month forwards does make the lira a high yielder, it does not seem as though the lira has yet attracted international demand for the popular carry trade. If the central bank can bring inflation and inflation expectations down, making real rates far less negative, then the lira could start to find some broader support. Otherwise, gradual depreciation on the back of high inflation looks to be the most likely path.

EUR The tug of war between the European Central Bank's apparent hawkishness and the poor economic performance in the Eurozone continues. December inflation numbers were mixed. The headline index rebounded as energy subsidies were removed, although the more important core index continued on its downward trend, and is now squarely below the ECB’s repo rate.       This week, there is not a lot of economic data on the docket. Focus among investors will be on speeches by ECB officials, specially chief economist Lane, who is expected to provide clarity on the ECB´s view of recent Eurozone economic weakness and its impact on monetary policy. Financial markets continue to see a decent chance of a start to easing in the Eurozone in the first quarter, although these expectations continue to be pushed further into the future in line with the broad repricing globally.