Issuing an Economic Alert, Standard Chartered said that they did not see space for further easing in monetary policy, given the inflation risks remaining high. The bank thus expects the current rates to remain stable at least until 1Q’ 2014.
“Although domestic and global supply conditions are likely to improve, inflation remains elevated and is still a risk owing to domestic factors (fiscal pressures); hence in our view there is no room for further policy rate cuts,” the bank said in its May Economic Alert.
Standard Chartered further expects inflation to spike in 4Q13 despite the expected moderation in headline inflation to 6.4 percent in 1Q13 and 6.3 percent in 2Q13 created space for the Central Bank to cut rates by 50 basis points to boost domestic demand.
“We expect inflation to spike in 4Q13 due to a pick-up in domestic demand and private-sector investment resulting from current policy easing and lower interest rates,” Standard Chartered said, analyzing the inflation trend over the past three years in 4Q, where seasonality plays an active role.
Standard Chartered, which earlier expected a two 25bps cuts by year end, termed the May 10 decision by the Central Bank as ‘aggressive’ but said it sent a clear signal that growth concerns override inflation risks, while also reducing the likelihood of further rate cuts in 2013.
However, the Central Bank Governor said the higher than expected rate cut was to reduce uncertainty in the market about future costs, indicating a stable policy-rate environment for the remainder of the year.
Standard Chartered further pointed out that during JanuaryApril 2013, net government borrowing (via T-bills and T-bonds) was equivalent to 83 percent of the budgeted full-year amount, much higher than the 58 percent figure for the same period last year. This indicates that the government is front-loading its market borrowing.
“We believe subdued tax revenues amid slowing GDP growth might have led to increased reliance on market borrowing to fund the fiscal deficit. Expectations of fiscal slippage and additional market borrowing are likely to remain high, limiting further T-bond gains,” Standard Chartered remarked.