Global and local economic activity has been moderating in 2Q, but there is still a decent probability that this slowdown could prove temporary. July PMI data due for release on August 1 will be key in helping us discern the likely path of global economic activity. While the recent sharp reversal in energy and commodity prices should help to allay mounting concerns over the current account deficit and inflation pressure for a while, any relief appears unsustainable in the event of a global revival in economic activity.
The currently observed deceleration in economic activity is mainly a consequence of the weakness in external demand, while there has been no visible slowdown in domestic consumption. Therefore, we are still away from a soft landing. Moreover, this is certainly not the expected result of the implemented policy mix aimed at rebalancing external and domestic demand. However, 2H11 could turn out closer to the desired picture, with another round of consumer loan rate increases after the mid-June decisions by the BRSA on general provisions, and to some extent due to the favourable base effect from loan demand brought forward in anticipation of higher costs. Many banking analysts mentioned that the loan growth is seasonally the lowest in 3Q and tends to be roughly half that of 2Q, ceteris paribus. This would bode well for the CBT’s efforts to curb lending growth to 25%. However, recently the 4-week average trend growth in consumer loans has exceeded the 2006-2010 average. According to my calculation, weekly changes in line with the 2006-2010 average in the second half would imply around 35% loan growth at the year-end – not much different from the current trend. Therefore, the CBT and the economy administration would need to see a much sharper deceleration than the seasonal trends in 2H, to rule out the need for further measures.
Going forward, the data and news flow (inflation, loan growth, external balance and measures) until the July 21 MPC meeting will be crucial, since in the meantime the CBT will also have reviewed its stance and other projections for the preparation of the Quarterly Inflation Report, slated for release on July 28.
I reckon that RRR hikes are not on the table now and policy rate decisions will be linked to the core inflation outlook. Although the likely convergence of the headline CPI to the CBT’s projections in June would support the credibility of the Bank, I think core inflation does matter and recent TRL depreciation should warrant a cautious stance due to the potential pass-through effect on prices. Barring a further deterioration in the global economic outlook, I think the CBT will need to embark on a more orthodox policy mix, considering our above target core inflation (I) forecast. We continue to expect a 100bp policy rate hike in 4Q11.
