FXStreet (Delhi) – Tim Condon, Chief Economist at ING, suggests that deep PPI deflation has squeezed business cash flows and calls for lower interest rates and the research house forecasts 50bp of PBOC policy rate cuts in 2016.
Key Quotes
“The December PPI data underscored that deep – -5.9% – PPI deflation will persist until global oil prices stabilize, which will allow base effects to kick in. As of last Friday, global oil prices were down over 40% YoY. If they stay at the current level for the rest of the year, the year-over-year decline would widen to over 50% by mid-year due to the high year-ago base effect from the bounce in global oil prices in 2Q15. However, it would narrow to 15% by December, allowing base effects to kick in. Eventually PPI deflation would return to the 2-3% it averaged from 2012 to mid-2014.
Deep PPI deflation squeezes business cash flows – the December industrial enterprise profits data are due this week – and calls for lower interest rates. We forecast 50bp of PBOC rate cuts in 2016, taking the 1-year lending rate to 3.85% by yearend (latest 4.35%, Bloomberg median 3.85%).
The PBOC appreciated the CNY fixing by 0.02% today, consistent with the DXY depreciation on Friday following the release of the US jobs data. We believe the PBOC is managing a basket peg with an eye to keeping the CNY NEER “basically stable at a reasonable equilibrium level” that we believe is around the level it reached immediately after the 811 devaluation. Elevated uncertainty about the exchange rate policy framework is the main overhang on global financial markets. The authorities could take steps to reduce the uncertainty by explaining their framework. We think the more likely scenario that the PBOC stabilizes its CNY fixings and fears of a maxi deval fade.”
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