The Central bank of Israel will meet on Monday to decide on interest rates

DATA REVIEW

• The SARB surprised markets by cutting the benchmark interest rate by 50bp to 5%, in what was called a ‘proactive’ move. The decision focused on the increase in the downside risks to the domestic growth outlook, in particular signs that domestic demand is running out of steam. But the recent easing in inflation has also led the SARB to lower their inflation forecast. More cuts cannot be ruled out, particularly as uncertainty over the global economic outlook is likely to remain but accelerating ‘core’ inflation will limit the extent of additional easing.

• Russian industrial activity appears to be stuttering, with output increasing 1.9% y/y in June, from 3.7% previously. In particular, the more externally exposed industries are struggling as a result of the weakening in global demand. Downgrades to our global economic forecasts suggest little relief in the coming quarters. More positively, domestic demand should remain relatively robust, particularly given the solid fundamentals driving household spending. The unemployment rate was 5.4% in June, below its pre-crisis low. Meanwhile, helped by lower inflation, real wages grew 12.9% y/y in June, a near four year high.

• The Central Bank of Turkey left the repo rate unchanged at 5.75%, and maintained the existing spread with the overnight borrowing rate. In an attempt to shore up fx reserves, the CBT once again increased the share of fx bank reserve ratios.

THE WEEK AHEAD

• The Central bank of Israel will meet on Monday to decide on interest rates. The policy rate has already been cut four times since September, primarily reflecting uncertainty in the euro area and slowing global growth. In part driven by the destabilising events in Syria, the shekel broke above 4 against the USD this week for the first time in over three years. However, while Israeli economic indicators since the June meeting (rate cut 25bp to 2.25%) have shown both faltering domestic and external demand and falling inflation, we expect a pause in easing this month. We believe policymakers will want to wait for more direction, both at home in relation to fiscal policy and from overseas as central banks act to support their economies. Nevertheless, a further rate cut is expected in the coming months.

• Formal talks with the IMF/EU on extending a stand-by loan started this week. This is not the precautionary loan that the Hungarian government was hoping for, and as such will come with quarterly supervision of the country’s balance sheet. However, an agreement needs to be reached first and given recent history we believe that negotiations will be protracted as the IMF/EU are likely to be troubled by Hungary’s economic agenda. With this comes the likelihood of delays in cutting interest rates as the central bank will probably be concerned that a reduction at this juncture could lead to HUF depreciation. As a result, we look for rates to be kept unchanged at 7% following next Tuesday’s monetary policy meeting.

• Monthly indicators suggest that South Korean economic growth slowed in Q2. We forecast GDP growth of 0.5% q/q (2.6% y/y), from 0.9% in Q1. Net trade is expected to have subtracted from GDP growth, as exports in USD terms fell 6.5% in Q2 on the back of soft Chinese exports. However, retail sales indicate that household spending appears to have remained firm, which should limit the slowdown. Lingering global uncertainties are likely to limit production and investment by exportdependent manufacturers for most of 2012. We look for GDP growth of 2.7% this year.

• Speculation has risen that the PBoC will cut bank reserve ratios as early as next week as debt redemptions, totalling RMB1 billion squeeze liquidity. The Chinese authorities have shifted to a pro growth stance reducing the bank reserve ratio by 150bp since December 2011, to 20% for large banks, and more recently cutting interest rates. We look for a further 100bp worth of reserve ratio cuts this year as well as at least one more interest rate reduction.

• Pranab Mukherjee is expected to be confirmed as India’s new President on Sunday. This could see a series of new measures by the government next week. While the June WPI inflation print prior to the July 31st interest rate meeting will have provided some comfort for the RBI, slowing by more than expected to 7.25%, from 7.55% in May, we believe the window of opportunity for an interest rate cut is closing rapidly. Concerns are also growing that a potential government price hike on regulated fuels and a poor monsoon will further stoke inflationary pressures in the coming months.