RBI Monetary Policy Committee is scheduled to meet on 5-7 June 2024. The European Central Bank (ECB) meeting is scheduled to meet on June 6. Both Central Banks will decide whether to hold interest rates or start their interest rate cut exercise before the US Federal Reserve bites the bullet. Both India and the European Union have been witnessing lower inflation over the past few months. In India, consumer price inflation is 85 basis points (bps) above RBI’s 4% target level.
In the Euro area, inflation was closer home at 2.4% in April 2024 with the inflation target being 2%. For India, with general elections and monsoon season just around the corner, RBI is on the wait and watch mode and the rate cut exercise might start by the end of this calendar year. ECB, on the other hand, seems more confident to cut interest rates in its June 6 meeting. With GDP growth of 0.5% YoY in Q1CY24, highest since January-March Quarter 2023 and consumer price inflation just 40 bps above target rate of 2%, ECB might just defy the largest global economy and cut interest rates by 25 bps on June 6, 2024. But before that, the ECB is definitely waiting for US inflation data to be released on May 14, 2024.
US Fed decision waited and watched globally
Every central bank waits upon the US Fed decision before setting its own interest rates. This is mainly because no Central bank wants to widen the interest rate differential with the US. The US interest rates at 5.5% offer the highest risk-adjusted returns on government bonds. With such high interest rates in the US, the demand for dollars increases as investors around the world sell their domestic currencies and buy dollars to invest in the US government bonds. As a result of higher interest rates in the US, dollar appreciates and other global currencies fall. The dollar index has gained 3.96% this year. USDX or the US dollar index measures the value of the US dollar relative to a basket of six foreign currencies namely Euro, Swiss Franc, Pound, Yen, Swedish Krona, and Canadian dollar. The US Federal Reserve is not keeping its interest rates high to appreciate its currency. Though the Bank of Japan is planning to do so, i.e increase its interest rates to stabilize its currency which has been volatile since April 30, 2024. Coming back to the US, interest rates were held at 5.5% on May 2, 2024. The US Federal Reserve is not confident enough to cut interest rates with inflation rate nearly 150 bps above its target level of 2%.
While consumer price inflation has come down from 9% levels in June 2022 to 3.5% in March 2024, it has to fall below 2% to allow the US Fed to cut rates. And in spite of the increase in the inflation rate, the unemployment rate is still below 4%.
But the recent manufacturing and services PMI in April 2024 has fallen below 50. Purchasing managers index (PMI), a significant economic indicator below 50 indicates contraction and above 50 growth. The upcoming US inflation data next week will make it clearer for the world economy and the waiting Central Banks around the globe.
