‘Don’t Ex­pect Next Fed Rate Hike Un­til 2018’

The Economic Times - - Money -

The US Fed­eral Re­serve is un­likely to raise in­ter­est rates un­til 2018, said Michael Sneyd, forex strate­gist at BNP Paribas. He said the Fed may con­sider a rate hike only if the US econ­omy does ex­cep­tion­ally well, but such a move could up­set equa­tions, chok­ing fund flows. Sneyd spoke to Saikat Das and Pratik Bhakta dur­ing his re­cent In­dia visit. Edited ex­cerpts:

What wor­ries the world mar­kets? The big­gest fo­cus over the last few weeks has been the Fed and its move to be more dovish.

What sig­nals are you get­ting from the Fed­eral Re­serve? A few weeks ago, Fed chief Janet Yellen said the way the Fed views the world has been un­changed. But the down­side risks to the US econ­omy have in­creased. Most of the down­side risks stem from what is hap­pen­ing in for­eign economies. It also ex­tends from what is hap­pen­ing in global mar­kets. She also made the point that it is a lot eas­ier for a cen­tral bank to cool down an over­heat­ing econ­omy than it is to stim­u­late an econ­omy that is not do­ing well enough. This shows that the Fed is con­cen­trat­ing on the down­side risks as part of its core view.

What is your take on a rate hike by the Fed­eral Re­serve? We do not ex­pect next Fed rate hike un­til 2018. If the data around the US ap­pear to be strong and the equity mar­kets re­main stable, then the Fed might care for a rate hike. How­ever, if they do a rate hike, then it would be an op­por­tunist rate hike to take ad­van­tage of the mar­ket con­di­tions.

So, will the Fed turn op­por­tunist? I think over the next nine months, the chances of that are quite low. The next June meet­ing is around the UK ref­er­en­dums, the next Fed meet­ing will be in Septem­ber that would be just be­fore the US elec­tions. The shift in the fo­cus has been on down­side risks and they mostly stem from abroad. Ac­tu­ally, the US eco­nomic out­look re­mains quite firm.

What are top three global con­cerns for emerg­ing mar­kets? If the US econ­omy does ex­cep­tional- ly well and the Fed hikes rates, that would be a ma­jor con­cern. More­over, the UK’s ref­er­en­dum (on its EU mem­ber­ship) is a ma­jor con­cern in Europe. The third point should be China. We do not ex­pect any­thing dra­matic from the growth side of China. The worry is around China’s de­val­u­a­tion. If the PBoC (Peo­ple’s Bank of China) de­cides to do some­thing re­gard­ing de­valu­ing their cur­rency that could have pos­si­ble im­pli­ca­tions on the global mar­ket.


Will PBoC be prompted to take any such step? We don’t think the PBoC has any plans for a sharp de­val­u­a­tion of the cur­rency. In terms of how the cur­rency has been mov­ing, a lot of our fo­cus has been on the switch of PBoC’s pol­icy of man­ag­ing dol­lar­ren­minbi to man­ag­ing the ren­minbi on a bas­ket ba­sis. Be­cause we have had a pe­riod of dol­lar weak­ness on a trade weighted ba­sis, the ren­minbi could de­pre­ci­ate while dol­lar-ren­minbi has re­mained stable. The si­lence of the PBoC is more a re­flec­tion that the dol­lar has started to move lower, which means that the ren­minbi has be­come weaker ver­sus the likes of the euro and the yen rather than due to the G-20.

Will this af­fect over­seas fund flows into emerg­ing mar­kets like In­dia? From a flows per­spec­tive, In­dia is the econ­omy which peo­ple like be­cause of the struc­tural story, whereas flows to the other parts of Asia tend to be tied to risk aver­sion. When the ex­pec­ta­tions have been for the Fed to hike rates, the peo­ple would not want to put their money into the emerg­ing mar­kets. There­fore, flows dry up par­tic­u­larly in the South East Asian coun­tries, but In­dia is an econ­omy which is dif­fer­en­ti­ated and it keeps get­ting flows whether the mar­ket is in a risk on or off mode.

Are In­dia bond yields still at­trac­tive for for­eign in­flows? This at­trac­tive­ness is also due to the fact that in­fla­tion in In­dia is com­ing un­der check. For­eign in­vestors like that. Thus, the real re­turn on In­dian as­sets still re­mains very strong. The kind of the stage that it is in its de­vel­op­ment cy­cle, keeps In­dia at­trac­tive. In In­dia, there are a lot of low-hang­ing fruits in terms of im­prov­ing the in­fras­truc­ture and the govern­ment has been very com­mit­ted to that. I would say there is a bit of dis­ap­point­ment about the progress of de­vel­op­ment, but if there is a time when this would be done, it would be done by this govern­ment.

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