RO: What factors could halt the rate-cutting cycle?
NBR rate decision on 7 August is likely to be a close call. There was little forward guidance in the minutes of the previous rate setting meeting from 5 July except that Board members were of the unanimous opinion that the decline in the annual inflation rate in the recent period and over the near term, on a significantly lower path than previously anticipated, but also the still elevated uncertainty surrounding developments over the longer time horizon warranted a prudent lowering of the monetary policy rate.
Since the previous NBR meeting, June inflation dropped further by 0.2pp to 4.9% y/y. July inflation due for release on 12 August is likely to inch briefly higher to 5.2% y/y mainly due fuel excise duty hike, though this was included in the NBR forecast assumptions, resuming thereafter the downward trajectory. Core inflation is expected to decline further by 0.3pp to 5.4% y/y in July. Thus, nothing really changed on the inflation front since the previous central bank meeting to halt the rate-cutting cycle. Hence, we expect the NBR to deliver another by 25bp to 6.50% vs no change Bloomberg survey median. We see material risks (30%) for a no change decision as fiscal policy poses significant risks to disinflation process.
The NBR decision making factors-in interest rate expectations for core markets. The market is currently fully pricing-in three 25bp rate cuts from ECB and 125bp of easing from US Fed by year-end. We expect the NBR to follow closely the ECB. There are three more NBR rate-setting meetings scheduled for this year.
The central bank is due to present an updated inflation outlook, with a downward revision already signaled. We forecast inflation at 4.0% y/y by end-2024 and 3.7% y/y by end-2025.
Core continued to decline in June to 5.7% y/y, from 6.3% y/y in May, in line with our expectations and 0.1pp below NBR forecast from May. The deceleration in core inflation was more broad-based in June. Core services inflation decelerated by 0.5pp to 8.2% y/y, while the underlying inflationary pressures from core non-food items eased by 1.1pp to 7.8% y/y. Core food items inflation went down by 0.5pp to 2.0% y/y.
20% trimmed-mean inflation, which is an alternative approach of measuring inflation by striping 10% of the most volatile monthly consumer price changes dropped to 3.9% y/y in June, from 4.3% y/y in May. Trimmed CPI suggests that June headline inflation decline was broad based.
BCR Manufacturing PMI survey showed that companies continued to absorb most of the impact from higher input prices by shrinking profit margins, as the output prices increased significantly less.
Market implications: positive for ROMGBs.