DATA REVIEW

  • The Reserve Bank of India reduced the cash reserve ratio from 4.75% to 4.5% while keeping the repo rate unchanged at 8%. The RBI has preferred to ease liquidity measures instead of cutting interest rates directly and this trend is likely to continue as policy makers remain cautious given sticky price inflation and the risk that WPI inflation accelerates in the coming months. This could see the timing for any interest rate reduction pushed into 2013. • The central bank of Brazil cut reserve ratio requirements to ensure inter-bank liquidity. With signs that economic growth has picked up in Q3, the monthly GDP proxy rose 2.3% y/y in July from 1% in June we believe that after 500bp worth of cuts since August 2011, interest rates have bottomed at the new record low of 7.5%.

  • The central bank of Turkey narrowed its interest rate corridor by cutting its overnight lending rate by 150bp to 10%, whilst leaving the repo rate unchanged at 5.75%. In addition, the reserve option coefficients were raised by 0.2pp , which could potentially increase the CBT’s gross reserves by USD3.6bn. The accompanying statement referred to the possibility of a ‘measured step in the same direction’. Although we believe that there is limited scope to cut the ceiling substantially, the prospect of a shaper than expected slowdown in H2 suggests a further 50 to 100bp decline. There is also a risk that the floor is reduced but this would likely lead to TRY weakness, something that the CBT is unlikely to want at this juncture, particularly given recent increases in global energy and food prices.

  • As widely anticipated the South African central bank (SARB) left the repo interest rate unchanged at 5%, following July’s surprise 50bp cut. Nonetheless, the accompanying statement was very dovish. The SARB’s GDP growth forecast was revised lower with emphasis placed on the downside risks to the economy. While inflation was forecast to remain with the 3% to 6% target band over the forecast horizon, we believe the recent increase in energy and agriculture prices are a risk to this outlook. While we believe that the central bank stands ready to cut rates if the economic outlook deteriorates sharply from here, our base case assumes rates on hold for an extended period.


THE WEEK AHEAD

  • HSBC’s China manufacturing PMI survey released on Friday, is unlikely to present a different picture from the ‘flash’ estimate. We look for a modest rise to 47.8 in September from 47.6 which suggests a stabilisation in activity and not as yet the widely anticipated recovery. The official PMI index released in October is likely to come in slightly better, remaining above 50 – the line between economic growth and contraction – as the survey has a greater share of large firms contained in their survey for which anecdotal evidence suggests an improving outlook. Nonetheless, this is unlikely to prevent GDP growth from moderating to 7.4% y/y in Q3 from 7.6% in Q2.

  • Following a surprise 25bp cut in the benchmark interest rate in August, we look for the Hungarian central bank to leave rates on hold at 6.75% on Tuesday. August’s monetary policy minutes showed a clear divide between the four external members (who voted for a rate cut) and the internal members (who argued for no change). We look for the recent acceleration in consumer price inflation coupled with the stalling in talks with the IMF/EU over a new standard line of credit, to see the majority hesitate in enacting another cut at this juncture We still believe that the next move will be downward, most likely in October when we expect another tentative 25bp reduction. The Hungarian government’s success in restarting talks with the IMF (they are aiming for mid October after sending a letter containing proposed changes to the conditionality agreements) would support this timetable.

  • The Bank of Israel has cut its benchmark interest rate by 100bp over the past year to 2.25%, with the key focus being the threat to GDP growth from external weakness. However, the renewal of QE by the FOMC and the ECB’s bond purchasing plan has reduced the immediate risks to the global economy. And given the acceleration in Israel’s inflation in recent months we look for a considerably more hawkish statement following the MPC meeting next Monday. Although we expect interest rates to be unchanged, we believe the next move is more likely to be upward.

  • The Turkish trade deficit has narrowed this year as imports have fallen and exports have proved surprisingly resilient, as external demand from the Middle East has argely offset the impact of sluggish EU demand. We forecast that the deficit narrowed further in August to $7.3n, from $7.9bn in July 2011. The improved trade position should support a further reduction in the current account deficit, a key vulnerability for Turkey, providing some support for the lira.