- Vipin Malik, Chairman and Mentor Infomerics Ratings.
- Sankhanath Bandyopadhyay, Economist, Infomerics Ratings.
The end of 2023 and beginning of the new year 2024 has brought some cheers that is reflected in a softening of the inflationary trends among leading developed economies. Decline in the inflation rate in US is strengthening the expectation of easing its monetary policy more quickly than expected. Headline and core inflation dropped to 3.2% year-on-year (y/y) and 4.0% y/y respectively. The biggest driver of the decline was a fall in energy and gasoline prices, followed by lower travel costs and hotel rates. As far as monetary policy is concerned, there is low probability to expect the first rate cut before June 2024. Before the Fed cuts interest rates permanently, it will probably ensure that core inflation declines sustainably and that the labour market continues to weaken. Due to the time lag in the impact of its monetary policy, it would normally have to act well before inflation reaches 2%. The market expects a rate cut of 25 basis points (bps) per meeting from June to December 2024, followed by a cut every other meeting until 2025. This would mean that the target range for the key interest rate would be 3.00% to 3.25% by the end of 2025. Another important topic for the financial markets in 2024 will be the election of the US president. It will take place on 5th November 2024, as will the complete re-election of the House of Representatives and the election of 33 of the 100 senators.
In UK, the inflation declined to 3.9 per cent in November2023, from 4.6 per cent in the previous month. Food and fuel prices have shown softening trends, that pull overall inflation down. Nevertheless, the recession fear is not completely wiped out. According to the Office of National Statistics of the UK, monthly real gross domestic product (GDP) is estimated to have grown by 0.2% in September 2023, following growth of 0.1% in August 2023, revised down from growth of 0.2% from the last reading. Looking at the broader picture, GDP showed no growth in the three months to September 2023. UK is facing subdued consumer optimism with mounting insolvencies, stalling retail sales and a warning of slowing demand that leaves the UK’s near-term outlook with a slow growth. The Bank of England (BOE) has highlighted that the UK interest rates would require to stay high for an extended period. The BOE kept its rate at 5.25 per cent with a 6-3 voting.
The Bank of Japan decided unanimously on 19th Dec23 that it would keep interest rates at -0.1%, while also sticking to its yield curve policy that references the 1% upper bound for 10-year Japanese government bonds as its limit in line with their quantitative and qualitative monetary easing (QQE). The monetary policy of Japan has provided major thrust on maintaining 2% inflation target with price stability. The yen shows downward trend, whereas Nikkei gained. As reported by the CNBCTV, the cost of hedging stands at 33% or 200 pips, its highest level, since BOJ’s July’23 meeting. The forthcoming wage increase would push up inflation further, as some labour unions would demand higher wages. BOJ’s MP states ” underlying CPI inflation is likely to increase gradually toward achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise.” It seems, the BOJ is more concerned about the financial market stability, and in its wait-and-watch mode; they would gradually modify the YCC policy only after a discussion with labour unions to understand the future path of the wage-price spiral.
The European Central Bank (ECB) will continue its restrictive monetary policy (at least in the first half of the year), as the ECB council has highlighted the lagged impact of the policy rate change on economic activity. ECB’s bank lending survey in Oct 2023 denoted further tightening in credit standards across all loan categories, and deceleration has been observed in demand for loans by non-financial corporations’ -0.9% in 3Q23 (4.4% in 1Q) and households 0.3% (vs 3% in 1Q). Fiscal policy is also likely to be restrictive compared to previous years, which will weigh on consumption.
In China, the market expectation about GDP growth is that it would slow to 4.5% in 2024 and 4.3% in 2025, after around 5.2% growth this year. The economic recovery following the lifting of all pandemic-related restrictions has been significantly less energetic than many expected. Consumer confidence has declined to its lowest level since 1991, which is putting pressure on consumption and is expected to continue into 2024. Around 70% of Chinese households’ assets are tied up in property, meaning that falling property values affecting wealth. Major fiscal stimulus measures by the government to strengthen growth are currently not in sight.