The US Federal Reserve kept its benchmark interest rates steady at 5.25- 5.50% in its June 12, 2024 meeting. Earlier last week, the US May jobs report came unexpectedly strong adding 2,72,000 jobs. Gross Domestic Product (GDP) growth rate for the US economy at 1.3% in Q12024, slowed down from 3.4% in Q42023 due to slower consumer spending. But as the unemployment rate is still low at 4% and the labor market is witnessing strong momentum, the US Fed deferred an interest rate hike and is more focussed on inflation control. The US inflation rate came in at 3.3% in May 2024 and is yet to move meaningly towards the 2% inflation target. The US monetary policy indicated a single rate cut by the end of 2024, as the median participant of the Federal Open Market Committee (FOMC) expects the federal funds rate to be 5.1% by the end of the year. Thus, a 25-basis point rate cut is on the table if the US labor market remains strong and inflation follows a downward path.
Earlier this month, the European Central Bank (ECB) and central banks of Canada, Sweden and Switzerland announced rate cuts diverging from the US Fed policy. The central banks around the world do wait upon the US Federal Reserve moves to avoid capital outflows and currency depreciation. But in recent years, the world has gone through one crisis after another and the pattern still continues. While central banks watch the US economy economic data and Federal Reserve decisions, their domestic conditions take precedence for stimulating growth and controlling inflation.
ECB Cuts Interest Rates, Diverging From The US Fed
The European Central Bank (ECB) cut its interest rates by 25 basis points (bps) on June 6, 2024, a day after the Canadian Central Bank made the same move. The Ukraine-Russian war in 2022 escalated energy prices hitting the core European economy leading to high raw material costs, rise in unemployment and slowing economic growth. Inflation is now under control at 2.6% in May 2024 (from a high of 8% in May 2022), unemployment rate stands at 6.5% in April 2024 for the Euro area and the GDP growth was at 0.4% in Q12024. While inflation target for both the US and European economies remains the same at 2%, the ECB has more elbow room to cut interest rates and revitalize its slowing economy. Thus, the European Central Bank made the right call by cutting 25 bps and lowering its interest rates to 3.75% from 4% instead of waiting for the US Fed moves.
RBI Maintains Key Policy Rates, Inflation Moderates In May 2024
The Reserve Bank of India has always been guided by the local weather and Indian pitch conditions. The Reserve Bank of India on June 7, 2024 kept its policy repo rate unchanged at 6.5%. The Monetary Policy Committee (MPC) which met on 5_7th June 2024 decided on the policy repo rate by a majority of 4 out of 6 members. The standing deposit facility (SDF) rate remains at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. The MPC also decided by a majority of 4 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the 4% target, while supporting growth. S&P BSE Sensex jumped more than 800 points after RBI monetary policy was concluded. The street was happy with the RBI real GDP growth forecast of 7.2% for 2024-25 upgraded from 7% as projected in April 2024 monetary policy meeting.
According to RBI, above normal south-west monsoon, strong agricultural sector activity, buoyancy in services activity, healthy balance sheets of banks and corporates and government’s continued thrust on capital expenditure will support strong GDP growth. If the economy grows as per the RBI forecast, it will be the fourth consecutive year with growth at or above 7% for India. The retail inflation data released on June 12, 2024 witnessed moderation in May 2024.
The retail inflation rate for rural and urban areas is 5.28% and 4.15%, respectively in May 2024. While retail inflation was lowest over the last 12-month period, Index of Industrial Production (IIP) dipped to 5% in May 2024 compared to 5.6% and 5.4% in February and March 2024 respectively. RBI is expected to cut interest rates in H2FY25 and that too if inflation behaves.
