In its last meeting, the RBI’s monetary policy committee had voted in favour of maintaining the status quo on interest rates.
In its July meeting, the US Federal Reserve decided, in line with expectations, to keep interest rates steady. The federal funds rate remains at 5.25 to 5.5 per cent. However, the change in the tone of the accompanying commentary indicates the possibility of a policy pivot in the near term. Federal Reserve chairman Jerome Powell said that if inflation moves in line with expectations, “a reduction in our policy rate could be on the table” in the September meeting. The Dow Jones index rose with markets seeing greater visibility on interest rate cuts. Other central banks in developed economies have already embarked on the path of easing policy rates. In its June meeting, the European Central Bank had cut interest rates as price pressures weakened in the Euro region. In July, the Bank of Canada had also reduced interest rates, its second straight rate cut. And on Thursday, the Bank of England also lowered interest rates by 25 basis points to 5 per cent.
The Fed’s policy statement noted that that has been “some further progress” towards achieving the 2 per cent inflation target. In June, inflation, based on the personal consumption expenditure index, rose 2.5 per cent. There is also the indication of the committee shifting focus from being solely fixated on inflation to being “attentive to the risks to both sides of its dual mandate” — inflation and employment. The unemployment rate in the US has risen to 4.1 per cent. With many in the market now pencilling in the first rate cut in September, attention will now turn to the quantum of cuts in the near term. This could have implications for emerging economies. As the International Monetary Fund had noted in the July update of the World Economic Outlook, “a number of central banks in emerging market economies remain cautious in regard to cutting rates owing to external risks triggered by changes in interest rate differentials and associated depreciation of those economies’ currencies against the dollar.”
In its last meeting, the RBI’s monetary policy committee had voted in favour of maintaining the status quo on interest rates. While two members on the committee — Ashima Goyal and Jayanth Varma — voted in favour of reducing interest rates and changing the policy stance, RBI Governor Shaktikanta Das has recently restated his position, saying that “it is too premature to talk about interest rate cuts”. In the coming months, as greater clarity emerges on the trajectory of food inflation, the path of interest rates will become clearer.
