time for the PBoC to restore confidence in China’s financial system to avoid the risk of a further slowdown in the real economy. As rightly pointed out in the MPC statement, the PBoC will also need to fine-tune its monetary policy stance to reflect the rapidly changing internal and external economic conditions. We therefore maintain our call that a rate cut of at least 25bps should be a part of the fine-tuning process if the new government does not wish to see a hard landing scenario materialise. Li-Gang Liu
We maintain our view that Hong Kong will not abolish its currency board system under which the HKMA follows the US Federal Reserve in setting its policy rate. As the US is forecast to have an extraordinarily low policy rate until Q4 2014, we expect Hong Kong’s discount rate to remain unchanged over the same period. Raymond Yeung
We expect the Reserve Bank of India (RBI) to closely monitor currency and capital flow movements over the month before its policy review on 30 July. Only once volatility settles and the currency stabilises, do we expect the RBI to continue lowering the policy interest rate, cutting the repo rate twice more this year. Lacklustre growth and diminished inflation pressures from lower energy prices (and, looking forward, a normal monsoon), set the scene for the RBI. But if the currency continues to weaken, the RBI will likely leave the repo rate on hold. Roland Randall
As soon as Bank Indonesia (BI) was confident that an average 33% fuel price hike was about to finally be implemented by the Government, it moved quickly to raise by 25bps the BI policy rate to 6.00% and the deposit facility rate (FASBI) to 4.25%. We expect BI to hike the policy rate and FASBI rate by 25bps on or around its upcoming meeting on 11 July. Inflation is set to reach nearly 8% over the coming months and policy tightening will help tame expectations. Our baseline scenario is for a 25bps move, however the risk would be tilted towards a shaper move higher, on either the FABSI or policy rate. A hike of 50bps would not be overly surprising Roland Randall
We expect Bank Negara Malaysia (BNM) to keep rates on hold at the policy meeting on 11 July. The tone of its policy statement has turned more dovish of late, however volatility in financial markets puts the chance of a rate cut very low. Growth has eased and the economy runs the risk of a current account deficit in Q2 as production at a key oil refinery is shut after a fire. We expect BNM to remain on hold through the year.
Daniel Wilson
We maintain our view that Bangko Sentral ng Pilipinas (BSP) will keep its overnight reverse repo rate for a prolonged hold at 3.50% to the end of 2014. We also reiterate our call for BSP’s SDA rate to stay on hold at 2.00%. With ANZ’s recent upward revision of 2013 GDP growth to 7.1% (up from 6.5%), along with our benign inflation forecast in 2013, we expect the central bank has enough room to keep rates steady. In our view, the Philippines is well-positioned to withstand recent market volatility. Eugenia Fabon Victorino
China GDP Growth Revised Down
Real activities remained weak while trade growth crashed in May. Given two consecutive months of weak data results, we thus revise down China’s GDP growth to 7.6% this year and 7.8% next year, from our previous forecasts of 7.8% and 8.0%, respectively.
Read More: China GDP to Hit the ‘Social Unrest Red Line’
- The official Purchasing Manager’s Index (PMI) fell significantly to 50.1, from 50.8 in May. The magnitude of the PMI drop has shown that China’s overall economic activity has decelerated further.
- Real activities remained weak in May. Industrial production moderated to 9.2% y/y in May, from 9.3% in April. Electricity production grew 4.1% y/y, down from 6.2%. Fixed asset investment slowed to 20.4% y/y in January-May, compared with 20.6% over January-April. Retail sales picked up slightly by 0.1% to 12.9%.
- Export growth eased to 1.0% y/y in May, compared with market expectations of a 7.4% increase and April’s 14.7%. The slowdown largely reflects the authorities’ efforts to crack down on such activities that seek financial gain from the large offshore and onshore interest rate differential and RMB’s appreciation.
- CPI inflation declined further to 2.1% y/y in May, from April’s 2.4%. Food inflation eased further to 3.2% y/y from 4.0%. Sequentially, CPI fell 0.6% m/m, compared with a 0.2% gain the prior month.
- Interbank interest rates surged in June, reflecting severe liquidity tightness. The 7-day repo rate, the most important indicator to gauge market liquidity conditions, rose to a record high during the month. Although market interest rates have eased somewhat, the tightness will likely remain in the near-term, highlighting heightened financial and slowdown risks.
