Brief Macro: The RBI Duly Caves in to Reality; Tame Inflation Implies a Further Rate Cut in Six Weeks and more

In this briefing:

1. The RBI Duly Caves in to Reality; Tame Inflation Implies a Further Rate Cut in Six Weeks
2. Preview: UK Disinflation Regulated for Jan-19
3. A Shrinking Eurozone Economy in 2019 Should Be Everyone’s Base Case.
4. Army Offered Plums / Widodo Hammers ‘propaganda’ / Steady GDP / March KCIC Land Target / Kamil 2024
5. Philippine CPI: Normalization Begins in January with Another Inflation Fade Out

1. The RBI Duly Caves in to Reality; Tame Inflation Implies a Further Rate Cut in Six Weeks

The RBI (Reserve Bank of India) cut its policy rate by 25bp, with the MPC (monetary policy committee) voting 4-2 in favour of the move. It also altered its monetary stance to “neutral” from “calibrated tightening”. We had said at the time of the RBI’s rate hike last June that it was making a major policy error ( RBI Raises Rates, but Will Likely Look Foolish when Inflation Moderates) because inflation was likely to completely bely the official forecast and move down rather than up. That has duly happened, with CPI inflation at 2.19% YoY in December 2018 (versus the RBI’s June 2018 forecast of “4.7% with risks tilted to the upside”). WPI inflation (not the RBI’s main target) has also eased to 3.8% YoY in December 2018. 

India’s real repo rate of +4.3% was among the highest in the world before this rate cut — and the new +4% real repo rate still remains exceptionally high. Although food prices are likely to decline less rapidly in the current quarter, headline CPI inflation is likely to edge up only slightly to 2.5-3% YoY in January-March 2019. This will allow the RBI to cut the policy rate further to 6% at its next meeting — still leaving the real repo rate above +3%.

The rational decline in nominal policy rates should provide a significant medium-term fillip to growth, allowing real GDP to grow more than 8% YoY in FY2019/20 and more in subsequent years as further structural reforms occur under a rejuvenated Modi government in its second term. After its initial negative reaction, we expect the stock market to also welcome the easier monetary conditions. We recommend staying Overweight the India equity and bond markets, especially after recent sell-offs (i.e., Buy into this weakness).  

2. Preview: UK Disinflation Regulated for Jan-19

• The imposition of a household energy price cap in the UK had a significant disinflationary effect in Jan-19 and lowered my CPI and RPI inflation forecasts to 1.9% and 2.5%.
• These outcomes would be below the consensus again, although that is now the norm amid a heavy bias to surprises, especially relative to the RPI consensus.

3. A Shrinking Eurozone Economy in 2019 Should Be Everyone’s Base Case.

In ” The Eurozone at 20: Will It Survive the Coming Slowdown?” I argued that the forthcoming data releases should shed some light on the future course of the Eurozone economy in 2019 and would likely result in downgrades to growth. In fact, the data was so bad, that a recession in the Eurozone should now be everyone’s base case although I doubt that is yet the case. The issue now is, with policy rates already negative in the EZ and a seemingly unyielding commitment to fiscal austerity, what sort of policy response can we expect and will the EZ be able to avoid a debt deflationary spiral?

4. Army Offered Plums / Widodo Hammers ‘propaganda’ / Steady GDP / March KCIC Land Target / Kamil 2024

As election campaigning enters the final 10 weeks, the Widodo administration appears intent to offer up to 500 coveted civil-service posts to military personnel, which would role back a key reform of the reformasi era.  But allied parties may object.  Widodo hammered Prabowo for ‘Russian propaganda’ and hiring foreign consultants.  GDP remained steady in 4Q18 at 5.17% yoy.  KCIC targets March for completing land acquisition for its Bandung fast train.  West Java Gov Ridwan Kamil acknowledged eyeing the presidency in 2024.

Politics: Military leaders, with the apparent backing of the administration, aim to revise the landmark 2004 Military Law and place up to 500 active officers into civilian posts throughout the state bureaucracy – a throwback to Soeharto‑era policies and an unwinding of a key reformasi‑era reform.  Excessively cautious advisors to the president may perceive a need to dangle sinecures before the Army, lest it align behind the challenger, Lt Gen (ret) Prabowo Subianto.  In any event, President Joko Widodo may drop the plan: resistance is likely from the public, the press, NGOs, the civil service, the police and perhaps (most significantly) parties in his own nominating alliance (Page 2).  A week ahead of a much‑anticipated one‑on‑one presidential debate, Widodo landed blows on Prabowo, accusing the Gerindra chair of resorting to “Russian[‑style] propaganda” and employing a foreign campaign consultant (p. 5).  Prabowo reiterated complaints about foreign workers (p. 7).  West Java Governor Ridwan Kamil readily acknowledged the possibility that he will run for president in 2024.  The move is unorthodox but he might earn credit for candor.  The prospect helps the long‑term outlook (p. 7).

Justice: Two Anti-Corruption Commission (KPK) investigators suffered assault while observing a Home Affairs conference with the Papua governor and his staff (p. 8). 

Infrastructure: Optimistic projections about completing land acquisition in March emanated from PT KCIC, developer of the Jakarta‑Bandung fast train.  Meanwhile, a Jakarta‑Surabaya semi‑fast train project is still under study (p. 8).  Construction of Soekarno‑Hatta’s third runway is on track, due in June (p. 9)

Appointments: Parliamentarians are considering 11 candidates, including two incumbents, for two seats on the nine‑member Constitutional Court.  Given a record of devasting impacts from rulings from the court, the appointment process merits the utmost care.  But parties appear inclined to decide along partisan lines (p. 10).   

Health: A nationwide Dengue outbreak has killed 169 but Jakarta Province officials have not yet declared a crisis.  The severity is still below that of 2016 (p. 10).

International: Tax officials said that a new mutual legal‑assistance agreement (MLAA) with Switzerland – Indonesia’s 10^th MLAA – will help track fraud (p. 11).

Economics: GDP remained steady in the fourth quarter, bringing full‑year growth to 5.17 percent.  Household demand remained firm, while fixed‑capital formation softened slightly from the preceding quarter (p. 12).  Spending on Community Funds – a key component of Widodo’s program – reached Rp60 trillion again in 2018 (p. 13).

5. Philippine CPI: Normalization Begins in January with Another Inflation Fade Out

• Headline inflation in January eased to 4.4%YoY (vs 5.1%YoY in December) although its annualized rate was back in positive territory (1.2%). Easing food inflation (5.6%YoY) and narrowing CPI rental & household utilities (4%YoY) supported inflation’s fade out. 

• Core inflation edged lower to 4.4%YoY. Still in excess of BSP’s inflation target range, the core CPI print bodes well for an unchanged policy rate in this week’s scheduled meeting of the Monetary Board.

• Non-food CPI’s momentum (2.4% annualized) now in positive territory although benign, offers policymakers a good enough reason to maintain the policy rate setting.

• Positive, annualized inflation rates registered by CPI restaurants and miscellaneous goods & services, and HH furnishings & equipment, since 2H18 affirm some discretionary expenditures stood resilient against peaking inflation in 4Q18 while other consumption items either wilted or stalled. As inflation fades this year, we expect resurgence in discretionary expenditures that would lead consumption recovery. With thriving discretionary demand and its potential 2019 recovery, likely shadowed by broader non-food CPI (60% of the CPI basket) upticks, policymakers bias to sustain its policy rate at 4.75% would stay intact. 

• A lackluster inflation backdrop augurs for a staggered bank reserve cut while allowing a positive, real interest rate condition to develop.

• Tactically, we are a sell on market rallies since the favorable inflation news including the CPI’s trajectory’s downtrend this year had been widely anticipated. Likelihood of an unchanged policy rate setting in today’s Monetary Board meeting also supports our tactical recommendation.