19 July 2018
China: Central bank finds different way to cut rates

The auction of government deposits at commercial banks reveals that the central bank is cutting interest rates, but not through its seven-day policy rate

Central bank guided government deposit rate lower

The central bank (People's Bank of China) guided auction rates on 91-day government deposits at commercial banks lower to 3.7% from 4.73% on 15 June.

We believe that this rate cut through a different channel than the PBoC seven-day (7D) policy rate means the central bank would like to see lower interest rates but doesn't want to send an obvious signal that it is loosening policy because financial deleveraging reform should still be ongoing.

The move has likely been triggered by the lower GDP growth rate of 6.7% in 2Q18 from 6.8% in 1Q18.

Though this is not a usual tool used by the PBoC, it's not the first time the bank has cut rates in this way. We saw this in June 2016 when GDP growth fell to 6.7% in 1Q16 from 6.8% in 4Q15.

Malaysia: GST removal dents inflation

We revise our 2018 inflation forecast from 1.8% to 1.0%. Lower inflation allows greater scope for the stable central bank policy

Gone with the Goods and Services Tax (GST) are inflation worries. This could be a loud statement about Malaysia’s just-released consumer price data for June. We revise our full-year 2018 inflation forecast from 1.8% to 1.0%. Lower inflation will allow a greater scope for the central bank (Bank Negara Malaysia) to keep the monetary policy stable for a prolonged period, or even ease in the event the global trade war adversely impacts the economy.

A downside inflation surprise in June

In a huge downside surprise, CPI inflation slowed to 0.8% year-on-year in June from 1.8% in the previous month. The consensus was centered on 1.3%. A sharp slowdown was mainly the result of the cut in the GST rate from six to zero percent effective June 1 by the new government. The effect is clear from the month-on-month price changes across CPI components, almost mirroring the impact upon the introduction of GST in April 2015 (see figure).

Downgrade of 2018 inflation forecast, again

The year-to-date inflation of 1.6% YoY has more than halved from 4% a year ago, led by a steep slowdown in key components of food and the transport prices. The GST will be replaced by a less severe Sales and Services Tax (reportedly by September), and any impact is likely to be transitory without significantly reversing the ongoing inflation downtrend.

Headline inflation is likely to turn negative in some months and remain low in the first half of 2019 - BNM policy statement in July

We now see inflation remaining well below 1% in the remainder of the year, or possibly even turning negative as the central bank has pointed out in the latest policy statement. This prompts another downgrade to our full-year 2018 forecast from 1.8% to 1.0%, the second since May when we cut it from 2.4%.

Reading time around 2 minutes

Good MornING Asia - 19 July 2018

It is easy to focus entirely on the political soap-opera that runs 24/7: from Washington to Moscow (via Helsinki). Brussels and Whitehall's dim corridors of rapidly eroding power. But lest we forget, the macro picture is important too and it is well worth watching over coming months

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