Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our economists and strategists across the globe.
Speaker: Coming up this week, we look at how the Bank of England and the ECB responded differently to rising inflation at their latest policy meetings.
Speaker: We examine the economic impact of high energy prices amid rising geopolitical tensions.
Speaker: And we get the key takeaways from India's new budget, which included a hefty increase in capital expenditure.
Speaker: This podcast was recorded on Thursday the 3rd of February 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Piers Butler.
Speaker: And I'm Aline Van Dyne.
Speaker: We begin this week in Europe as Thursday was a big day for central banks with both the Bank of England and the ECB holding meetings.
Speaker: But with inflation surging in both the UK and the Eurozone, it appears the banks are taking different approaches to monetary policy.
Speaker: Let's get the details from Simon Wells, our chief European economist.
Speaker: Simon, let's start with the Bank of England.
Speaker: They raised rates by 25 basis points, but there was support for a 50 basis point hike.
Speaker: Tell us what's going on there.
Speaker: Yeah, that's right, Aline.
Speaker: The Bank of England hiked 25 basis points as expected, but the vote was very much unexpected with a 5-4 split and four MPC members voting for a larger 50 basis point hike.
Speaker: I think what's going on is that the four that wanted the larger rate rise are looking at the near term inflation outlook, which is considerably higher than it was a few months ago, but still predominantly driven by what might be one off effects, principally, of course, energy prices.
Speaker: So those four are worried that the near term elevated inflation will feed through into higher inflation expectations.
Speaker: And therefore, they think a bit more aggressive near term action is warranted.
Speaker: On the other hand, the longer term inflation forecast was interesting.
Speaker: It actually dropped well below target.
Speaker: So the MPC is balancing this trade off.
Speaker: And it was clearly a finely balanced decision.
Speaker: Now, another big question is the outlook for the balance sheet.
Speaker: Any further insights?
Speaker: Well, they've pretty much done what they said they would do in the guidance that they offered last August.
Speaker: So bank rate has now reached 0.5 percent.
Speaker: And that is the point at which Bank of England said it would stop reinvesting maturing assets in its government bond portfolio.
Speaker: So we are now there and it will not reinvest the big redemption that comes in March or indeed any further redemptions as long as nothing substantial changes.
Speaker: What's more surprising was that it also said it was going to sell off and run down its £20 billion budget.
Speaker: corporate bond portfolio.
Speaker: And while this is small for monetary policy purposes, I guess it does signal that the bank is serious about balance sheet reduction.
Speaker: So Simon, what does this all mean for the policy rate path ahead?
Speaker: Well, that's a very good question.
Speaker: I think our view is the 5-4 split, that trade-off between near-term high inflation and longer-term falling inflation that the Bank of England sees.
Speaker: I think what that potentially means is interest rate hikes may happen
Speaker: sooner than previously expected, but I'm not necessarily sure it follows that we're therefore going to get to a higher level of interest rates.
Speaker: It might mean the risks are balanced towards earlier moves rather than necessarily more moves.
Speaker: Finally, Simon, the ECB also met today.
Speaker: No changes to policy.
Speaker: Is there a divergence between the ECB and the Bank of England?
Speaker: I think there are some important differences.
Speaker: One thing that was similar, of course, was that the market took both announcements as a little bit hawkish.
Speaker: So we've now seen a repricing and there's
Speaker: almost 40 basis points of ECB policy rate rises priced in now by the market by the end of this year.
Speaker: But the difference between the ECB is it still has some forward guidance in terms of sequencing, which is it will not raise interest rates until it has ended net asset purchases or QE.
Speaker: And of course, only a few weeks ago in December, it sort of set out a path for QE that included a plan for bond purchases in the second and third quarter of this year and beyond.
Speaker: So if the market's right and we're going to see 40 basis points of timing this year or anything close to it, the ECB has either got to change, modify its QE that it announced back in December, or it's got to change
Speaker: plan sequencing of policy changes.
Speaker: At the press conference today, it seemed that the sequencing wasn't really up for much discussion.
Speaker: On the other hand, Christine Lagarde, the ECB president, said that they would
Speaker: reassess everything in light of new forecasts in March.
Speaker: So it is possible that it may reassess, recalibrate quantitative easing in March, and that could potentially open the door for a rate rise this year.
Speaker: But for 40 basis points this year, that still looks a little overdone in our view.
Speaker: Thanks, Simon, for updating us on all those details.
Speaker: Thank you, Eileen.
Speaker: One key factor behind those inflation concerns has been the sharp rise higher in energy prices.
Speaker: And these have been pushed even higher recently due to the tensions between Russia and Ukraine.
Speaker: Janet Henry, Global Chief Economist, has been looking at the potential impact on the world economy.
Speaker: She joins me now.
Speaker: Janet, welcome to the podcast.
Speaker: Thank you.
Speaker: So how are and how will these higher energy prices impact inflation around the world?
Speaker: Well, energy inflation was already very high in many places at the end of 2021 and even the January releases that have already come through.
Speaker: Across Europe, it's been contributing in some places more than half of total inflation, which in the euro area is.
Speaker: hit 5.1% in January.
Speaker: In Asia, although we've seen wholesale price rises happening certainly for gas, energy inflation and indeed broader inflation is a lot lower.
Speaker: And in the US, gasoline prices have been the major factor pushing up energy inflation, but it's very different to Europe.
Speaker: Only two percentage points of the latest 7% print that we've had out of the US was driven by energy.
Speaker: And given the current rises in wholesale prices, the risk isn't necessarily that it pushes inflation significantly higher in the early months of 2022.
Speaker: It just means that it's going to be a lot slower to come down in the course of the year.
Speaker: And of course, that will pose additional risks on the growth front and indeed on the policy front.
Speaker: So how will this impact growth?
Speaker: Well, in the past, typically when energy prices push up inflation, that squeezes real wages.
Speaker: We are certainly seeing that in many of the advanced economies currently when we've got such high inflation prints.
Speaker: That means that consumer spending tends to slow quite sharply.
Speaker: And in some cases, we've seen outright declines in the past.
Speaker: in consumer spending in response to energy price shocks in the past.
Speaker: But these are unusual times.
Speaker: And of course, over the last 18 months during the pandemic, consumers, many consumers have accumulated a lot of additional savings.
Speaker: That could mean that they could draw on those as their living costs start to come up.
Speaker: under pressure, but it may not.
Speaker: And already it looks like growth is slowing in early 2022.
Speaker: So this isn't an easy mix for central banks.
Speaker: How are they going to respond?
Speaker: Well, for central banks, yes, it's not an easy contribution of downside risks to growth and upside risks to inflation.
Speaker: And given that it's a very different backdrop, as I say, to the last time when Europe imposed sanctions on Russia, which happened at a very low rate of inflation, the growth risks actually are not so severe at the moment to outweigh what are now growing inflation risks.
Speaker: So it is that wage risk that could mean that central banks in some places do have to move more aggressively on the policy front.
Speaker: And if we think about the majors, we certainly think the risks are higher for the Fed than for the ECB, where too much may be priced in already.
Speaker: If the Fed does have to move more aggressively, then the fact is hopes of a US soft landing could fade.
Speaker: Janet, thanks very much for your time.
Speaker: Thank you.
Speaker: We finish in India where the government has presented its new budget for the fiscal year.
Speaker: An increased capex spending is at the heart of the plans as the country emerges from the pandemic.
Speaker: Pranjal Bandhari, Chief India Economist is here to talk us through the details.
Speaker: Pranjal, what was the main message from the budget?
Speaker: Yeah, so it was a period of fiscal consolidation.
Speaker: They bought down the fiscal deficit by 0.5% of GDP, which means that they had to choose expenditure priorities carefully.
Speaker: And here they've given a big push to CapEx.
Speaker: The CapEx outlays have been increased by 35% year on year.
Speaker: The big question is, is this realistic?
Speaker: Will it get done?
Speaker: Is there absorptive capacity on the ground?
Speaker: And I think this time the answer is yes, because this time the design is a bit different.
Speaker: It's not just the central government which will do this capex, but a lot of it will also be done by state governments.
Speaker: They are giving a huge amount of interest-free loans to the states of India.
Speaker: It's a project that started last year and they've scaled it up in a big way this year.
Speaker: So the CapEx pushes for real.
Speaker: But on the other hand, they've had to cut back somewhere.
Speaker: And that area is social welfare spending.
Speaker: Rural employment guarantees have come off in a big way at a time when the demand is actually soaring.
Speaker: Even for area like housing, which was a favorite in the past, the outlays have been kept fairly constant.
Speaker: So my sense is the main strategy is move from temporary social welfare schemes to something more permanent, you know, CapEx and the jobs that CapEx produces.
Speaker: Are the numbers credible?
Speaker: Broadly, I would say yes.
Speaker: For the year that's just ending, FI22, they have a fiscal deficit of 6.9%.
Speaker: My sense is it'll come down a bit lower.
Speaker: It'll come at around 6.6% because tax revenues have been underestimated in the budget.
Speaker: But for the next year, FY23, our senses that they've gone in a little cautiously, they've sort of gone in with lower privatization receipts, lower tax revenue growth, and I think that's the right way to be at a time when growth is extremely volatile and hard to predict.
Speaker: So I'm very happy on the revenue side.
Speaker: On the expenditure side, as I mentioned, the capex spend is realistic.
Speaker: They may have to spend a little bit more later on on subsidies and social welfare schemes.
Speaker: But I think overall, the fiscal deficit number will not change very much.
Speaker: What are some of the strengths and weaknesses in the budget?
Speaker: the biggest strength of the budget is the credibility, the stability in the tax regime, some of the transparencies in the numbers which were sort of missing a couple of years ago.
Speaker: The other strength is fiscal federalism, the fact that they're giving a lot more money to the states to do capets, that's good for center state relationship.
Speaker: And the third strength in my view is innovation.
Speaker: There are a lot of new ideas in the budget.
Speaker: For instance, a new central bank digital currency to be launched this year,
Speaker: some battery swapping infrastructure, green sovereign bonds that will be issued, 5G auctions, some innovation on drone as a service.
Speaker: So there are a lot of new things in the budget this time.
Speaker: But on the other hand, there are some weaknesses.
Speaker: As I mentioned, social welfare schemes outlays are weak.
Speaker: And also the GSEC market borrowing number is extremely high at 15 trillion rupees.
Speaker: And the bond market is not taking it very kindly.
Speaker: And what's the likely impact of all this on growth?
Speaker: So when you're going through a period of fiscal consolidation and bringing down the fiscal deficit, then generally there's a growth drag.
Speaker: But this time, there's also a change in the kind of expenditure.
Speaker: Higher capex generally have higher multipliers.
Speaker: So my sense is that the two will cross each other out.
Speaker: And our sense is that the growth impact is neutral.
Speaker: Pranjal, that's a great summary.
Speaker: Thanks very much.
Speaker: Great to be here.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Simon Wells, Janet Henry, and Pranjal Bhandari.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint, Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
