Trevor Williams Emerging Markets Weekly
December 14th, 2014
From Trevor Williams, Lloyds Bank
Indian wholesale price inflation moderated to 7.2% y/y in October, from 7.5% in September. Encouragingly, core inflation eased to 5%, a near 3 year low and near the Reserve Bank of India’s comfort zone of 4%. Although today’s WPI outcome coupled with recent reforms does raise the possibility that the RBI will surprise markets following Tuesday’s monetary policy meeting we maintain our view that the RBI will leave the refinancing interest rate unchanged at 8%, preferring to ease liquidity through another cut in the cash reserve ratio – down 25bp to 4.25%.
We look for interest rates to be reduced in Q1 2013 although this could be delayed if the INR continues to sell off The INR has been one of the worst performing currencies this year and with the trade deficit widening to a record low of USD21bn in October it will remain vulnerable to changes in market sentiment.
The central bank of Russia raised its deposit rate by 25bp to 4.5% whilst leaving the refinancing rate unchanged at 8.25% achieving the authorities’ goal of narrowing the corridor. Meanwhile the fx swap rate was reduced by 25bp to 5.5%. On balance, we view the changes in policy to be neutral.
Although the central bank is uneasy about inflation remaining above target (6.5% y/y in November) demand pressures have eased. Consumer spending has slowed sharply in H2 and despite a forecast increase in retail sales growth to 4.0% in November, from 3.8% in October, a likely deceleration in real wages does point to a further moderation in the household sector over the next couple of months, as elevated inflation erodes their purchasing power. Against a backdrop of soft external demand and weakening domestic demand industrial production is forecast to remain subdued, increasing 1.9% y/y in November from 1.8% in October. Consequently we do not look for any tightening in monetary policy next year.
Turkish GDP growth slowed in Q3, increasing 1.6% y/y, from 3% in Q2. As expected domestic demand fell for the third consecutive quarter with declines in household spending and investment more than offsetting rising government consumption. Meanwhile, on the back of stronger export growth, net exports made a positive contribution to Q3 GDP growth.
On balance we believe that the disappointing Q3 GDP outcome and October’s weak activity figure strengthens the argument for a cut in the policy interest rate as early the December meeting. The surprise deceleration in consumer price inflation over the past two months is a further argument for this as is Governor Basci’s comments that ‘a measured cut’ may be considered particularly if the TRY continues to appreciate. We look for a 25bp cut in the benchmark policy rate to 5.5% following Tuesday’s meeting with a 50bp reduction in the overnight lending rate to 8.5%.
The National Bank of Hungary has cut interest rates in the past four meetings by a cumulative 100bp. We expect rates to be reduced by a further 25bp to 5.75% following Tuesday’s meeting with a further 75bp of cuts forecast to the end of March 2013. The key constraint on rate cuts is the exchange rate. An abrupt sell off could halt the easing cycle.
By Trevor Williams
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