Are interest rates headed northwards?
At a time when most economies are still unsure of the strength of the economic recovery, Reserve Bank of Australia (RBA), has taken the lead and has hiked cash rate by 25bps to 3.25% for the first time in 19 months. It is the first among the G-20 nations to take this stance- A clear indication of the fact that RBA believes that an accommodative monetary policy is no longer required.
This came amidst warnings from the IMF that risks to the global economy continues to be on the downside. Most economists are of the view that this rate hike has come in a tad too soon.
In its policy review yesterday, European Central Bank and Bank of England have left interest rates unchanged maintaining that they have been cautious and prudent.
In India, RBI has already indicated that we have seen an end of rate cutting regime. But the moot question remains – Is this the time for interest rates to move northwards? Here the governor is caught in a Catch 22 situation. The stance taken should not hamper the fragile economic recovery witnessed and at the same time should not fuel inflationary pressures.
We have seen economic conditions better with the industrial production and export numbers improving. But inflation will remain a concern with deficit monsoons and CPI hovering around the 10% mark.
Speculation is rife that RBI will maintain status quo for the time being at the quarterly policy review slated for October 27.
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Firmly believe that the Central Bankers would wake up and start acting once China makes the move (the recovery started with China stimulus and collective action by Central Banks thereafter). Do not think with year end and festive season close by, anything drastic will happen this year and Chinese New Year is around end of Jan so depending on the retail sales number during the festive period and inflation numbers, we should see a small hike in Feb next year. Even though the quantum is not expected to be significant, the message should be..
ReplyDeleteAustralia has already made the move and RBI in India has already given an indication of the same. Most Central Bankers are still unsure of the sustenance of the recovery and will hence wait for at least another quarter to see how things pan out. I agree to the fact that all eyes are on China for cues...
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