Central banks likely to cut rates from June-July, align with pre-Covid range: Morgan Stanley

Central banks world over are likely to cut interest rates from June-July this year to bring real rates closer to the pre-Covid range, according to Morgan Stanley.

Morgan Stanley says that Asian central banks will wait for the Fed to begin cutting rates in June before they embark on policy easing. The rating agency has revised India's FY25 GDP growth to 6.8% from 6.5% last week. It says strength in domestic demand in India is also reflected in bank loan growth tracking at 10 year high.

As inflation continues in a downward trajectory, real rates across the region are rising. Investment banking firm Morgan Stanley suggests that risks arise if rate cuts are held back to the first quarter of 2025 or later due to US Fed rate cuts getting delayed and/or supply concerns lifting oil prices to USD 110-120 per barrel.

"About 80 per cent of the region's economies already have inflation within or below the central banks' target range. For the rest of the region, the gap to the target range is also narrowing, suggesting that the price stability goal is within sight," the report 'Asia Economics: The Viewpoint: What if rate cuts are delayed?' authored by Chetan Ahya, Derrick Y Kam, Jonathan Cheung, said.

If oil prices rise to US$110-120/bbl in the next 3-4 months due to supply or geopolitical concerns, this would create concerns over the inflation outlook.Higher energy prices would lead to higher headline inflation pressure and may impartupside risks to the inflation outlook.

Also if nominal policy rates stay higher for longer, it would pose downside risks to growth.

In India, the Reserve Bank of India (RBI) maintained the status quo in the repo rate for the seventh time in its April meeting. The repo rate is the rate at which RBI lends to banks.

Inflation has been a concern for many countries, including advanced economies, but India has managed to steer its inflation trajectory quite well.

RBI has raised the repo rate by 250 basis points cumulatively since May 2022, to 6.5 per cent.

Retail inflation in India is in RBI's 4-6 per cent comfort zone but is above the ideal 4 per cent scenario. In February, it was 5.09 per cent. In April policy the central bank has raised concerns about the high temperature forecast by IMD in the April-June 2024.

Moving on to the US, the US Federal Reserve, in its March meeting, voted to leave the key interest rate unchanged at 5.25-5.50 per cent, keeping the policy rate unchanged for the fifth straight time on the trot.

The US central bank does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2 per cent.