Bank Indonesia surprised the market by cutting the 7-day reverse repo rate (RRP)by 25bps to 4.25%, its second consecutive rate cut. The cut was a response to stillsubduedlending activity and lower-than-expected inflation, in particular food priceinflation (which fell to 1.5% y-o-y in July and August). Although its policy stanceremains neutral, BI left open the possibility of further easing, which it stated wouldbe contingent on inflation. We expect no change for the rest of 2017.
As expected, the Reserve Bank of India kept the policy repo rate unchangedat 6.25% in today’s policy meeting, stating that premature action at this stagerisks disruptive policy reversals later and the loss of credibility. The central bankhowever decided to cut the statutory liquidity ratio (SLR) by 50bps to 20%,effective from fortnight starting 24 June. One interesting feature of this policywas that, for the first time, there was dissent by one of the MPC members whowas in favor of a rate cut.
冠亚体育网站，In a unanimous decision, Mexico’s central bank raised the monetary policy rate by 25 bps to 6.75%. In our view, the main driver behind thisdecision was the acceleration in headline inflation. Given the inflation backdrop we continue to expect Banxico to hike in tandem with the Fed overthe remainder of 2017. This would take the policy rate to 7.25% by the end of 2017 where we expect it to remain on hold until the end of 2018.
It was evident from the April inflation data and the outlook for the next fewmonths, that the central bank would sound less hawkish in this policy meetingand would revise their inflation forecasts downward. Indeed, the inflationforecasts were revised downward with the new forecasts showing CPI likelyto be in 2.0-3.5% range in the 1H of FY18 (earlier estimate was 4.5%) and in3.5-4.5% range (earlier estimate was 5.0%) in the 2H of FY18. This forecast doesnot incorporate one-off inflation risks from HRA allowances, which is likely to beimplemented sometime during this fiscal year. We are forecasting CPI inflation toaverage 3% in 1H of FY18, and slightly lower than 5% in the 2H of FY18, resultingin an average inflation of 4% for FY18. We have factored in some incrementalinflation uptick from HRA allowances in the 2H of FY18.
In South Korea, we now expect the BoK to remain on hold through 2017 (previously expected a cut in Q4) due to the clear shift in focus away frommonetary and towards more active fiscal policy. See Bank of Korea Watch: Hunky-dory, 25 May 2017 for more details.