Global Monetary Conditions Will Continue To Tighten Until Inflation Brought Down: BoB

Amidst the statements by major central bankers at Jackson Hole, the global monetary conditions will continue to tighten until inflation is brought down, said the Bank of Baroda in a report.

The report stated that this has made investors jittery as it also increases the risk of recession. Some signs of a slowdown are emerging from flash PMIs, increased cost of living in the United Kingdom (UK) and a drop in consumer confidence in the Eurozone. 

Given the indication by the flash Purchasing Managers' Index (PMI) for Aug 2022, both manufacturing and services activity in the United States (US) and Europe seems to be facing setbacks in the wake of elevated prices. While in US CPI remains sticky and PPI has begun to come down, they remain a concern in the Eurozone and UK.

“The looming energy crisis and fast approaching winter season can add to the woes of Europe. In the US, the impact of aggressive rate hikes by the Fed is set to hamper growth. In addition, China’s industrial production, retail sales, FAI, property investment, and home sales, all registered weaker than estimated growth in July 2022,” the report said.

However, the report also said that supported by PBOC’s stimulus measures, official PMIs (both manufacturing and services) are beginning to see a turnaround in Aug 2022. But, sustaining the momentum will be the key, which remains a tough task if demand from the US and Europe falters.

Domestically, India’s real gross domestic product (GDP) rose by 13.5 per cent in Q1FY23, the fastest pace compared to the last three quarters, despite an elevated base (20.1 per cent in Q1FY22). While GVA rose by 12.7 per cent in Q1FY23 against 3.9 per cent in Q4FY22 and compared to 18.1% in Q1FY22. Sector-wise, services outperformed.

The consumer price index (CPI) came in slightly lower at 6.7 per cent in Jul 2022, down from 7 per cent in Jun 2022. Food inflation moderated further, supported by softening prices of vegetables, meat and fish, oils and fats, and milk and milk products. Core inflation edged down by 30bps to 5.7 per cent in Jul 2022 on account of a sharp dip in transport and communication. 

“We believe RBI will hike rates by another 50bps during the year. Going forward, we expect India’s 10Y yield to trade in the range of 7.20 to 7.30 per cent in the coming fortnight. We also expect the rupee to trade in the Rs 79.75-80.0/ USD range in the near term,” the report added.

Fed Chair, Powell, in his speech at the Jackson Hole admitted that there will be consequences of high-interest rates on the labour market and economic growth. 

He also reiterated that Fed remains committed to bringing inflation substantially down, thus signalling continued rate hikes by the central bank in the upcoming meetings, despite running the risk of recession. 

Further, ECB officials also indicated that the bank will have to hike rates even if it leads to a recession. ECB officials Holzmann and Knot have also signalled that a 75bps rate hike should be discussed in the September 2022 meeting.

In the US, while the CPI print for July 2022 remained unchanged from the previous month at 8.5 per cent versus an estimated  8.7 per cent, it remains at elevated levels, considering Fed’s long-run annual target remains at 2 per cent. Moderation in PPI in July 2022 (-0.5 per cent  MoM) versus an estimated 0.2 per cent increase also gives hope that prices might be stabilising now. 

The latest data indicates that after a three consecutive monthly decline, consumer confidence in August 2022 improved. 

Initial jobless claims also fell to 243,000 for the week ending 20 August 2022. However, whether the momentum can be sustained or not will be key to watch. Flash PMIs show that business activity slowed further in August 2022 to a 25-month low with PMI at 51.3 from 52.2 in July 2022. 

the report stated that services activity contracted even more in Aug’22 with PMI registering at 44.1 (27-month low) versus 47.3 in July 2022. This is bound to impact economic growth in Q3CY22. 

Talking further about global developments, the report stated that the chances of a growth slowdown in the Eurozone are significantly higher as an ongoing energy crisis is already pinching on the pockets of consumers and businesses. 

Inflation in the Eurozone climbed up to a fresh record high at 9.1 per cent in Aug 2022 from 8.9 per cent in July 2022, driven by gas prices and a drought.