By Mani. Originally published at ValueWalk.
The central banks of Australia, India and Thailand won’t change interest rates this week, though India and Australia could announce further cuts in rates in September and November respectively, suggests Morgan Stanley (NYSE:MS). In their “Asia / Pacific Weekly Preview” research note, analyst Derrick Y. Kam and his team explain that they anticipate Indonesia will report a deceleration in growth.
Australia could prune interest rates to 1.75% in November
Kam and colleagues expect the Reserve Bank of Australia to leave the cash rate at 2% at this week’s meeting, though the central bank could emphasize its readiness to trim interest rates again in the coming months. The analysts point out that thanks to a subdued inflation report for 2Q and the increased capital requirements for investment property loans, the case for further easing in Australia has been strengthened.
The following table captures the upcoming events calendar for this week across the Asia / Pacific region:
Tracking the upcoming data, the Morgan Stanley analysts point out that Australia’s trade balance will likely widen further to –A$2.9 billion on the back of ongoing weakness in commodity prices and a reported pickup in imports. The analysts expect the July employment report on Thursday will reveal a flat outcome for jobs and an uptick in the unemployment rate to 6.1%.
Turning their focus to the housing segment, Kam and team anticipate that the housing finance data for June will be more interesting than usual amid the backdrop of tightening macro-prudential policies. The analysts forecast a 1% decline in new commitments, continuing the slowdown in volumes which has evident since mid-2014.
Two interest rate cuts anticipated in India before March
Focusing on China, Kam and team anticipate that the official PMI will edge down to 50.1 in July from 50.2 in June. They believe aggregate demand growth in China is likely to remain weak as indicated by the sequential fall in major commodity prices, which is likely to weigh on manufacturing production growth in July.
Turning their attention to India, the Morgan Stanley analysts anticipate that the Reserve Bank of India will keep interest rates unchanged when it meets on Aug. 4. The analysts believe the central bank may choose to wait for the monsoon season to be completed before changing its view on the inflation outlook, which it had bumped up on June 2. Against this backdrop, the analysts believe there is a high chance that the central bank will choose to keep policy rates on hold.
However, Kam and colleagues believe the RBI’s expected decision on Aug. 4 will be a temporary pause as they anticipate that the Reserve Bank of India will cut interest rates by 25 bps on Sept. 30 and by a further 25-50 bps by the end of March 2016. Thus, considering the 75 bps cut already undertaken by the RBI, the analysts point out that the expected cumulative cut would be 125-150 bps for this cycle.
In regards to Indonesia, the analysts anticipate its July headline inflation will come in at +7.0% YoY, while they expect Korea’s current account surplus will widen in June on the back of the larger goods trade surplus, which continues to be driven mainly by lower imports. Kam and team expect Taiwan’s CPI inflation to remain low in July, largely due to downward pressure in global energy prices.
Finally, focusing on Thailand, Kam and team point out that high-frequency indicators point to no evidence of a robust recovery following a soft 1Q15 and the low base in 2014. The analysts don’t have any more rate cuts pencilled into their base case for Thailand. Drawing reference to the BoT and expressing concerns over the currency weakness and its impact on the economy, the analysts believe they would indicate that policy rates are likely to be kept on hold this week as the central bank monitors the currency movement while seeking to preserve policy space.
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