Inflation data for April will be released on May 15.
As was expected, on Wednesday, the US Federal Reserve voted to keep interest rates steady as inflation remains elevated, and uncertainty persists over the trajectory of inflation. The federal funds rate remains at 5.25-5.5 per cent. “Inflation is still too high”, acknowledged Fed chair Jerome Powell. Data released by the US Labour Department had previously shown that inflation, as measured by the consumer price index, rose to 3.5 per cent in March, up from 3.2 per cent the month before, exceeding expectations. This indicates that the last mile of disinflation is proving to be difficult. As the Fed also notes, “in recent months, there has been a lack of further progress towards the committee’s 2 per cent inflation objective.” Inflation data for April will be released on May 15.
In the beginning of this year, there were expectations of multiple rate cuts by the Fed this year. In fact, the Fed dot plot had pointed towards the possibility of three rate cuts. However, with uncertainty over inflation, not only has the timing of the rate cuts been pushed back, but there has also been a scaling down of the magnitude of the rate cuts. Cuts are only likely to materialise when there is “greater confidence” on the trajectory of inflation. The strong growth momentum in the US economy — as per the Fed, “economic activity has continued to expand at a solid pace”, “job gains have remained strong”, and the “unemployment rate has remained low” — provides room to the Fed to keep rates higher for longer. However, while actions of the US Fed do tend to reverberate across the world, not all central banks are likely to delay cutting interest rates. In fact, the dynamics across major economies may be diverging. Christine Lagarde, President of the European Central Bank, has strongly asserted that the bank is “data dependent, not Fed dependent”. There are indications of the Euro zone central bank likely to begin cutting rates in June. There are also expectations of the Bank of England cutting rates before the Fed. Inflation in the UK moderated to 3.2 per cent in March, down from 3.4 per cent in February.
In its last meeting, the monetary policy committee of the Reserve Bank of India had voted to keep interest rates unchanged. The MPC also faces a conundrum. Food inflation is elevated, while core inflation remains subdued. And with the RBI projecting inflation at 4.5 per cent in 2024-25, real interest rates are at 2 per cent which might be considered excessive. While there are expectations of monsoon being above normal this year, clarity will emerge in the coming months. Greater certainty over the monsoons, and the trajectory of food prices could provide space to the MPC to pivot.
