Shaktikanta Das debuts as RBI guv with surprise rate cut

09 February, 2019, 16:26 | Author: Brooke Harris
  • RBI cuts repo rate in first policy review under new governor

The Bank said that endless uncertainty over the Brexit negotiations meant companies were hunkering down and cutting investment.

The pound rejected sub-US$1.29 levels on Thursday even after the Bank of England slashed growth forecasts, indicating underlying strength. "With downside risks to growth, and inflation well within the comfort zone of the RBI, and real interest rates high, a rate cut was expected", said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank.

In its quarterly health check, the Bank has cut its growth forecast for the economy in 2019 from 1.7% to 1.2%, placing the blame on a slowing global economy, as well as Brexit uncertainty. Carney said that the markets were right to keep the possibility of a hike on the table and that the United Kingdom economy would rebound under a softer Brexit.

Bank of England governor Mark Carney warned that Britain was "not prepared" for a no-deal Brexit.

It came as the monetary policy committee voted to keep interest rates unchanged at 0.75 per cent.

Carney said that the possibility of a "no-deal" Brexit has gone up since the aftermath of the Brexit vote in 2016, when it was considered unlikely.

In recent weeks, it has also eased curbs on some state-owned bank lenders and is set to provide the government with a bigger dividend out of surplus central bank funds.

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Rain Newton-Smith, the chief economist at the CBI, the business lobby group, said: "It's now crunch time - a no-deal scenario must be taken off the table because the economy is seizing up from uncertainty".

The greenback is extending gains against the likes of the pound, euro, swissie and loonie and that is resulting in a drop in cable below the 1.2900 handle.

The UK economy is expected to report on the manufacturing, the fourth quarter GDP and the January inflation during the upcoming week with all figures painting the same picture of the general economic slowdown.

Financial markets have cut almost one full quarter point rate rise over the next two years since the last inflation report in November, factoring in just a 50/50 chance of one hike in 2019.

The Bank said growth was likely to have halved to 0.3% in the fourth quarter of 2018, down from 0.6% in the previous three months and estimated it will fall again to 0.2% in the first quarter of 2019. Nevertheless, the forecasts suggested that just one more quarter-point hike would be needed in the next three years to return inflation to close to the 2 percent target, down from nearly three hikes seen in November. However, inflation dropping to a 18-month low of 2.19% in December appears to have prompted the MPC to go in for a cut.

Interest rate futures indicated investors slightly scaled back their expectations for a rate hike this year.

In its minutes, the Bank continued to stress that interest rate rises were likely to be needed "at a gradual and to a limited extent".

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