Friday, May 8, 2015

Around the world by central bank (Part II)

Following on from the previous post on developed economies, this post looks at monetary policy in some of the key emerging economies.

People’s Bank of China

GDP growth in China came in at a better-than-expected 7% in the year to March, though that result seemed at odds with the sharper slowdown in the partial activity indicators including retail sales, fixed asset investment and industrial production.  More recent forward looking indicators suggest the down-trend has not stabilised yet.  The HSBC manufacturing PMI fell to 49.2 in April and while the official index remained unchanged at 50.1 over the same period, the employment index dropped to 48.0. 

While the Government has become more flexible about meeting its growth target recently, we’ve always thought protecting the job market from the adverse effects of a sharper than desired slowdown was a firmer bottom line.  That suggests the recent more aggressive steps to ease monetary conditions and lower the cost of capital will continue for a while yet.  We expect further interest rate cuts and reductions in the required reserve ratio in the period ahead.  These are likely to continue until the property market forms a firm base.

Reserve Bank of India

The key to the improved growth outlook in India has been the supply-side reform progress being made by the new Modi government.  This has seen the “unblocking” of the infrastructure investment pipeline, land and tax (likely introduction of a GST) reforms and the “Make in India” program.  Lower oil prices are also a net benefit to India.  It’s not all rosy however – a poor rainy season will impact on agricultural production and still soft global growth is still weighing on exports.

It’s the improved inflation outlook and the reform initiatives that will make lower inflation more likely to be sustained that have afforded the RBI scope to lower interest rates twice this year.  We think another 2-3 cuts in the repo rate are likely in the months ahead.

Banco Central do Brasil

COPOM (the monetary policy committee of the Brazilian central bank) raised the benchmark Selic rate a further 50 bps to 13.25% last week.  That’s despite the fact the economy being in recession on the back of both tighter monetary and fiscal conditions.  We are forecasting GDP growth of -0.5% in calendar 2015.

Inflation remains problematic with the CPI up 8.13% in the year to March 2015.  That is now well outside COPOM’s target range of 2.5% to 6.5%.  We think inflation is probably close to its peak, although the annual rate seems likely to remain elevated in the months ahead. That means we may also be close to the peak in interest rate although I won't completely dismiss the possibility of a final push higher at the June meeting.  Given the weak growth environment there will probably be scope to start easing monetary conditions again later this year or in early 2016.