RBI monetary policy: Four charts show markets are preparing for a rate hike

The interest-rate cycle in India is turning. The central bank may be set to tighten policy next week to keep inflation in check and stem the declines in the rupee if the rate-market moves are any indication.

The Reserve Bank of India hasn’t tinkered with rates since August, and even cut inflation projections last month, raising expectations that borrowing costs would remain on hold. But a surprising hawkish tilt revealed in its April policy minutes and the recent spike in oil has boosted speculation the authority may lift rates at its June 6 meeting.

“Front-end bonds are fully pricing in a 25-basis point hike in June,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. in Mumbai. “Even accounting for some higher supply absorption premium, one can say that a 75-basis point increase seems to be comfortably discounted over the next year.”

Lower agriculture input costs to contain food inflation

The government’s annual budget for fiscal year 2019 provides for support prices for agricultural produce to be increased to 50% mark-up over costs. That’s made the Reserve Bank of India and other market participants wary about the risks to food inflation. Bloomberg Economics’ agriculture input cost index shows that these concerns might be overdone.

• The latest value for the month of April shows that agriculture input cost inflation was a negative -0.25%, marginally higher than -0.71% in March. Click here for details on Bloomberg Economics agriculture input cost index.

• The average agriculture input cost inflation over the past year has been -1.4%. This has helped bring down food inflation. Food inflation that has a 46% weight in the CPI basket averaged 2.4% over the last year

As Inflation gets 'ugly' in April, RBI may be pushed to hike rates

India’s inflation accelerated more than estimated in April, providing ammunition to hawks in the central bank to tighten monetary policy and fueling a selloff in bonds.

Consumer prices rose 4.6 percent in April from a year earlier, the statistics ministry said in a statement in New Delhi on Monday, higher than the 4.4 percent median estimate in a Bloomberg survey of economists. It was the first pick-up in inflation in four months.

The data -- the final price print before the Reserve Bank of India’s next rate decision on June 6 -- highlights the risks from surging oil prices in Asia’s third-largest economy. The central bank expects oil prices averaging around $78 a barrel to stoke inflation by 30 basis points.

US Fed rate hikes not needed till mid-2018 as inflation is low: Prez Evans

Sluggish price increases in the United States give the Federal Reserve room to hold off on interest rate increases until at least mid-2018, Chicago Federal Reserve President Charles Evans said on Wednesday.

"If we get to that point and have more confidence that inflation is moving up sustainably, then further rate increases would be warranted," Evans, who does not have a vote on rates this year but participates in the central bank's policy debates, said in a speech at a banking conference.

Evans did have a vote on the Fed's policy-setting committee last year and dissented in the Fed's decision to raise rates in December because of his concerns over low US inflation rates, which have been persistently below the Fed's 2 percent target in recent years. Investors expect the Fed will raise rates in March and policymakers in December signaled three hikes would be warranted this year.

US core consumer prices record biggest gain in 11 months in December

Underlying US consumer prices recorded their largest increase in 11 months in December amid strong gains in the cost of rental accommodation and healthcare, bolstering expectations that inflation will gain momentum this year.

The Labor Department said its Consumer Price Index excluding the volatile food and energy components rose 0.3 per cent last month also as prices for new motor vehicles, used cars and trucks and motor vehicle insurance increased.

That was the biggest advance in the so-called core CPI since January and followed a 0.1 percent gain in November. Core CPI increased 1.8 percent in the 12 months through December, picking up from 1.7 percent in November. Economists polled by Reuters had forecast core CPI rising 0.2 percent month-on-month and holding steady at 1.7 percent on an annual basis.

Weak import and producer price reports this week had raised concerns about the inflation outlook, although the two reports do not have a strong correlation with the CPI data.

Economists are hoping that a tightening labor market, rising commodity prices and a weak dollar will lift inflation toward the Federal Reserve's 2 percent target this year.

The U. S. central bank's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, has undershot its target since May 2012.
READ MORE

Wall Street drops as CPI data boosts December rate hike odds

Wall Street's three major indexes opened lower on Thursday, shying away from their record high closes, as an uptick in consumer prices inflation boosted the odds of another interest rate hike this year.

A Labour Department report showed consumer price index (CPI) rose more than expected last month and the gain was the largest in seven months, lifting the year-on-year increase to 1.9 percent from 1.7 percent in July.

Despite the uptick, both CPI and personal consumption expenditures, the Federal Reserve's preferred inflation measure, remain stuck below the central bank's 2-percent target.

"I don't think they should raise rates in December, but they will, in order to counteract any kind of slowdown in the overall economy," said Robert Pavlik, chief market strategist at Boston Private Wealth.

After the data was released, the odds of a hike in December rose to top 50 percent for the first time since July, from 41.3 percent, according to CME Group's FedWatch tool.

The CPI data is the last to be released before the Fed's Sept. 19-20 policy meeting, where it is expected to outline a program to start offloading its $4.2 trillion balance sheet.
READ MORE

Arab states' sanctions boost food prices, hurt real estate in Qatar in July

Sanctions imposed by other Arab states are continuing to push up food prices in Qatar while hurting the real estate market, but not to the point of damaging the economy severely, according to inflation figures released by the government on Tuesday.

The annual inflation rate fell back sharply to 0.2 per cent in July. It had spiked to 0.8 per cent in June from 0.1 per cent in May after Saudi Arabia, the United Arab Emirates (UAE), Bahrain and Egypt cut diplomatic and transport ties with Qatar on June 5, accusing it of supporting terrorism, which Doha denies.

By closing Qatar's land border with Saudi Arabia and disrupting maritime shipping routes, the sanctions slashed Qatari imports by more than a third in June, pushed up prices of some basic goods and hurt business sentiment in Doha.

There were fresh signs of that damage in the July inflation numbers. Food and beverage prices climbed 4.5 per cent from a year earlier - their fastest rate of increase since at least 2014, and accelerating from a rise of 2.4 per cent in June.
READ MORE

European Central Bank keeps easy money stance despite better growth

The European Central Bank left its ultra easy monetary policy stance unchanged as expected on Thursday, keeping rates at record lows and even leaving the door open to more asset buys if the outlook worsens.

After ECB chief Mario Draghi raised the prospect of policy tightening last month, he signalled that any policy tweaks would come only gradually, setting the scene for a possible discussion in September about a long-awaited tapering of its asset buys.

"We need to be persistent and patient because we aren't there yet, and prudent," Draghi told his regular news conference after a meeting of ECB policy-makers in Frankfurt.

He stressed that the bank's governing council were unanimous both on the decision to keep its guidance unchanged and to avoid setting a precise date for a discussion of future policy, noting only that it would occur in the autumn.

With the euro zone economy now growing for the 17th straight quarter, its best run since before the 2007-08 global financial crisis, that at least suggested the ECB is starting to contemplate easing off the accelerator, preserving some firepower after printing nearly 2 trillion euros to jump start growth.

The prospect of reduced monetary stimulus has kept financial markets edgy, with investors sifting through clues to gauge how big central banks around the globe will unwind unconventional policy that have kept borrowing costs at rock bottom.
READ MORE

Wall Street records fresh highs on Yellen's rate hike views at testimony

US stocks opened higher on Wednesday after Federal Reserve Chair Janet Yellen said interest rates hikes would be gradual and will not have to rise much further to reach neutral rate.

Yellen, in a prepared testimony to be delivered to Congress at 10 a.m. ET (1400 GMT), said the economy is healthy enough to absorb further gradual rate increases and the slow wind down of the Federal Reserve's massive bond portfolio.

The testimony depicted an economy that, while growing slowly, continued to add jobs, benefited from steady household consumption and a recent jump in business investment.

Investors and some Fed officials, concerned with the recent dip in inflation, have been wanting to see a surer progress toward the central bank's goal of 2 percent inflation.

Yellen ascribed the inflation drop to "a few unusual reductions in certain categories of prices" and said it would eventually drop out of the calculation.

"I'm not very surprised by Yellen's comments. She's been pretty steadfast that we're raising rates... The market is liking the fact that she's seeing economic growth," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.

"What the Fed's doing and she's doing is continuing the case for raising rates."

The U.S central bank will also issue its Beige Book at 2 p.m. ET, a compendium of anecdotes on the health of the economy. The Fed's next policy meeting is on July 25-26.

At 9:38 a.m. ET, the Dow Jones Industrial Average was up 133.61 points, or 0.62 percent, at 21,542.68, the S&P 500 was up 16.18 points, or 0.66 percent, at 2,441.71.
READ MORE

Fed policymakers hint tensions on inflation, divided over debt holdings

Federal Reserve policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rate rises, according to the minutes of the Fed's last policy meeting on June 13-14 released on Wednesday.

The details of the meeting, at which the US central bank voted to raise interest rates, also showed that several officials wanted to announce a start to the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities by the end of August but others wanted to wait until later in the year.

"Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors...however, several participants expressed concern that progress...might have slowed and that the recent softness in inflation might persist," the Fed said in the minutes.

The committee questioned why financial conditions had not tightened despite recent rate rises and a few said equity prices were elevated.

US stock prices were up slightly at the close of trade while yields on US government debt dipped. The dollar was little changed against a basket of currencies.

Last month's 8-1 vote to lift the benchmark interest rate another quarter per centage point, its second this year, signalled the Fed's confidence in a growing US economy and the eventual inflationary effects of low unemployment.

In a press conference at the time, Fed Chair Janet Yellen described a recent decline in inflation as temporary and the central bank kept its forecast of one more rate rise this year and three the next.

READ MORE

Fed raises rates by 25 bps: What it means for inflation and labour market

The Federal Reserve has raised the interest rates at which banks borrow by 25 basis points to 1.12 per cent on Wednesday for the second time in three months, brushing off a recent run of mixed economic data. It forecasted one more hike this year.
The Fed has now raised rates four times as part of a normalisation of monetary policy that began in December 2015. The central bank had pushed rates to near zero in response to the financial crisis.

What reasons did the Federal Reserve cite?

1. The US central bank's rate-setting committee said the economy had continued to strengthen, job gains remained solid and indicated it viewed a recent softness in inflation as largely transitory.

2. The Fed also gave a first clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.

3. It expects to begin the normalisation of its balance sheet this year, gradually ramping up the pace. The plan, which would feature halting reinvestments of ever-larger amounts of maturing securities, did not specify the overall size of the reduction.

What is the initial cap?

The initial cap for the reduction of the Fed's Treasuries holdings would be set at $6 billion per month, increasing by $6 billion increments every three months over a 12-month period until it reached $30 billion per month.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, rising by $4 billion at quarterly intervals over a year until it reached $20 billion per month.
READ MORE