Global Economic Prospects 2014

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Prospects Daily: China’s swap rate drop to one-year low, Eurozone inflation eases; unemployment falls to 16-month low, India’s central bank leaves key interest rates unchanged in June

Financial Markets
 
China’s benchmark interest rate slid to a one-year low after the government said it will cut the reserve requirement ratio for some of the nation’s banks, the latest in its efforts to support growth in the world’s second-largest economy. China’s one-year interest-rate swaps, the fixed payment needed to receive the floating seven-day repurchase rate, tightened 9 basis points (bps) to 3.38% after falling to as low as 3.33% earlier, the lowest level since June last year. Further, the yield on the benchmark 10-year government securities fell 23 bps in May, the steepest monthly drop since September 2011.
 
Thai stocks advanced, with the benchmark gauge erasing losses since late-May military coup, as the new government is expected to take steps to accelerate state spending, implement key economic policies, and approve the new fiscal budget. Thailand’s SET index gained 0.9% at Tuesdays’ closing, the highest level since October 29, as foreign investors made net purchase of $82 million in Thai shares. The Thai baht also gained 0.5% against the dollar to 32.69, the strongest since May 14.
 
 
High Income Economies
 
Putting additional pressure on the European Central Bank this week to stimulate the economy and to settle fears of deflation, flash estimates from Eurostat showed that Eurozone headline inflation fell to 0.5% (m/m) in May from 0.7% in April.  The decrease was more-than-expected as economists forecast the rate to ease marginally to 0.6%.  Inflation has been below the target of 'below, but close to 2 percent' for the sixteenth consecutive month.
 
At the same time, the jobless rate in the Eurozone fell more-than-expected to 11.7%, the lowest since November 2011, from 11.8% in March.  Economists had expected the rate to hold steady at 11.8% for the fourth straight month.  The number of unemployed totaled 18.75 million in April, down by 76,000 from March.  The figure fell by 487,000 from a year-ago.  Austria and Germany posted the lowest rates among the member states, while Greece and Spain remained on the top of the list with highest rates.
 
South Korean annual inflation accelerated for the third straight month to 1.7% (y/y) in May from 1.5% in April, driven by higher food prices.  The core inflation rate, which excludes volatile oil and agricultural products rose 2.2%, slowing from a 2.3% increase in April.
 
 
Developing Economies
 
Europe and Central Asia  
Turkey’s annual consumer price inflation accelerated to a two-year high 9.7% in May, up from a 9.4% increase in April, largely exceeding the central bank’s year-end inflation target of 7.6%, upwardly revised in April from 6.6%. This acceleration was due to higher food and non-alcoholic beverage prices, which rose to 14.1 % (y/y) from 13.1% (y/y) in April. Month-on-month, consumer price inflation slowed to 0.4% in May after rising 1.3% in April.
 
Meanwhile Turkey’s annual producer price inflation came in at 11.3% in May, slowing from a 12.9% increase in April. On a monthly basis, producer price inflation fell 0.5% after remaining broadly flat in April.  
 
Middle East and North Africa  
Egypt’s Markit/HSBC Purchasing Manager’s Index for the non-oil private sector fell to a four-month low 48.7 in May from 49.5 in April, continuing to remain below the no-change 50 mark, which denotes contraction. Among the components of the index, the new orders sub-index, a gauge of domestic and external demand, fell for the third consecutive month in May and at the fastest pace since January. The new export order sub-index improved slightly to 47.0 from 46.5 in April. Staffing levels continued to fall, declining at a faster pace than in April. Input price inflation slowed to a seven-month low, while output prices fell for the second consecutive month.
 
South Asia  
At its meeting of June 3rd, 2014 India’s central bank decided to leave its key interest rates unchanged, noting that risks to inflation remained balanced.  The repo rate was left unchanged at 8% for the second consecutive meeting; the reverse repo rate was maintained at 7%; and the cash reserve ratio was also left unchanged at 4%. The statutory liquidity ratio, which sets the proportion of deposits that banks should invest in bonds was, however, lowered by 50 basis to 22.50%, effective from June 14, 2014. 

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