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Prospects Daily: G-7 reaffirms commitment to market determined exchange rates, Indonesia and Russia keep policy rates unchanged, India’s inflation accelerates

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Financial Markets…The yen strengthened 0.7% to 93.69 per dollar on Tuesday, bouncing back from an earlier drop, after a group of seven officials stated that G-7 statement on market-determined exchange rates was misinterpreted by investors. The Japanese currency dropped to a 33-month low of 94.46 yesterday. The dollar has risen more than 8% versus the yen year-to-date.

Equity placements (combination of IPO and secondary public issuance) from the Asia-Pacific region excluding Japan totaled $24.6 billion year-to-date, nearly four times the $6.4 billion raised during the same period last year and to the highest level since 1995. The robust start to the year coincides with the rally in the region’s benchmark stock index (the MSCI index excluding Japan), which is up about 15% from September last year.

Hungary is offering 5-year and 10-year dollar-denominated bonds on Tuesday in its first sovereign foreign-currency bond issuance in nearly two years, as the government end a quest for the International Monetary Fund support. A 5-year note is priced to yield about 345 basis points over U.S. Treasuries and a 10-year bond at a spread of 355 bps.

High-income Economies
…The G-7 finance ministers and central bank governors reaffirmed their commitment to market determined exchange rates, in a statement released in London today, a day ahead of the G-20 meeting in Moscow. This statement was made in attempt to calm rising fears of a currency war, as concerns are growing on weakening yen, which according to the Japanese authorities are aimed to stimulate weak economy and arrest deflation.

business confidence index based on a survey of 400 companies increased to 3 in January from 2 in December, but remains below its long-term average level. This improvement reflected better external conditions, including in global equity markets, China’s economic rebound, as well as recent policy rate cuts domestically.

In the U.K., the annual consumer price inflation remained unchanged at 2.7% (y/y) since October and above the central bank’s 2% inflation target. On a monthly basis however, inflation moderated in January with the CPI index declining by 0.5% (m/m) compared to a 0.5% (m/m) increase in December. Core inflation eased marginally to 2.3% (y/y) in January from 2.4% in December. Manufacturers' input cost inflation meanwhile accelerated to 1.8% (y/y) in January from o.5% in December, driven by crude oil prices.

residential property prices accelerated to 3.3% (y/y) in December from 2.2% in November. On a monthly basis, the house price index increased by 0.9% (m/m) in December, following a 0.5% rise in November.

consumer prices fell 0.3% (y/y) in January following a 0.4% drop in December. On a monthly basis, the CPI slipped for a third consecutive month and was down 0.3% (m/m) in January compared to a 0.2% decline in December.

Developing Economies
In the East Asia and Pacific region, Indonesia’s central bank kept its benchmark interest rate unchanged at a historic low of 5.75% for the 12th consecutive month. Headline inflation rose slightly to 4.7% (y/y) in January after a 4.3% (y/y) gain in December reflecting higher electricity tariffs, rising minimum wages and food prices, but within the central bank’s 4.5% (±1%) annual inflation target range.

The Philippines’
exports growth accelerated to 16.5% (y/y) in December from 5.5% (y/y) in November. For the full year, total exports were 7.6% higher than in 2011, supported by strong growth in non-electronic goods (mostly to Japan) and service sector exports. Electronic shipments, which account for about 45% of total merchandise exports, contracted by 5.5% (y/y) in December after growing by 13.3% (y/y) in November, and were down 5.2% for the full year.

In the Europe and Central Asia region, the Russian central bank kept its benchmark overnight refinancing rate on hold for the fifth consecutive month at 8.25%. Despite declining growth, inflation in Russia accelerated to 7.1% (y/y) in January 2013 from 6.6% (y/y) in December well above the central bank’s 5-6% annual inflation target.

Inflation in Macedonia decelerated to 3.7% (y/y) in January from 4.7% (y/y) in December reflecting a weak economic activity. On a monthly basis, prices rose by 0.3% (m/m) after being flat during the previous month. 

In Middle East and North Africa, Egypt’s exports rose 12% (y/y) in January, up from 2% in December, supported by a recovery in agricultural and textile goods shipments. However revenue from Egypt's Suez Canal fell to $405.1 million in January, down 4% (m/m) and almost 10% lower than last year. The Suez Canal is a key source of foreign currency for Egypt, but revenues (along with exports) have been affected by political unrest.

In South Asia,
India’s industrial production fell by 0.6% (y/y) after contracting by 0.8%(y/y) in November pulled down by disappointing performance in mining, manufacturing, capital and consumer goods and pointing to continued weakness in the economy. On a monthly basis, output fell by 0.7 % (m/m) compared to a gain of 0.3% the previous month.

Separately, India's consumer price inflation accelerated to 10.8% (y/y) in January, from 10.6% in December led by rising food and energy prices. India cut its benchmark policy lending rate by 25bp in late January to 7.75% following a 50bp cut in April last year, despite the fact that inflation remained stubbornly high.

The Pakistani currency fell to a historic low of Rs 100.1 to the US Dollar on Monday. Currency lost 3% of its value since the beginning of the year, and 10% compared to January last year. Rising oil prices, a persistently weak economy, poor macro-fiscal fundamentals and declining foreign exchange reserves reflecting IMF loan repayments, have all contributed to weakening the currency.

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