RBI among 26 global central banks that have been on a rate cutting spree

Despite holding repo rate steady at 5.15 per cent on Thursday and surprising economists and markets alike, the Reserve Bank of India (RBI) is one of the 26 global central banks out of the major 31 that have been on a rate cutting spree, according to a Julius Baer Research. The remaining 5 – those in Sweden, the United Kingdom (UK), Norway, Canada and Czech Republic – have hiked their key rates.

Thus far in calendar year 2019, the RBI has slashed the repo rate by 135 basis points (bps) to 5.15 per cent. The reverse repo rate, too, remained unchanged after the RBI monetary policy committee (MPC) meet at 4.90 per cent, and the marginal standing facility (MSF) rate and the bank rate at 5.4 per cent.

With the RBI’s rate-setting meeting over, the attention now turns to the US Federal Reserve’s (US Fed’s) two-day policy meet that begins on December 11. Central bank in late October cut their benchmark overnight lending rate a quarter point to a range of 1.5% - 1.75%, the third such move in 2019.

The recently released US FOMC minutes pointed to agreement amongst participants that monetary policy should remain on hold as long as there isn’t a “material reassessment” to the economic outlook. Participants, according to reports, also pointed to a continuing need to provide insurance against potential downside risks to the growth outlook and the importance of raising core inflation.

"While we expect a run-of-the-mill recession of two quarters of negative GDP growth in the second half of 2020 for now, cutting the target range for the federal funds rate to zero may not be enough to jumpstart the economy," wrote Philip Marey, Senior US Strategist at Rabobank International in a recent report.

A recent note by Bloomberg suggests Fed to remain on hold next year after having provided an estimated 100 basis points of cuts in 2019. If the federal funds rate remains above 10-year Treasury yields at the 2019 yearend, then further reductions will follow in 2020—though officials will be increasingly reluctant to act as the election nears, it said.

Meanwhile, the European Central Bank (ECB) and the Bank of Japan (BoJ) are also scheduled to meet on December 12 and December 19, respectively to take a call on their key rates.

Falling bond yields underline increasing market expectations that the BOJ could try to squeeze more stimulus out of its monetary framework this year. Any benefits of extra stimulus, according to the Bloomberg note, would be countered by heavier strain on the financial system.

Image source: Julius Baer Research