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When central banks loosen money, it’s time to get bullish and fill your boots with shares. Loose money has been the primary inflator of asset prices in the last 10 years or longer. Should 2019 see slower economic growth – but easy money – equity prices will rise.
Meanwhile, central banks continue to flag growth risks The Bank of England said current financial forecasts were overly optimistic, adding that Brexit-related uncertainty is burdening the economy. BoE has downgraded its 2019 GDP forecast to 1.2% against 1.7% expected in November. This follows the European Commission’s view of "substantial" risks that lowered its growth forecast to 1.3% in 2019 from 1.9% previously. This clearly indicates that no rate hike will be coming in 2019. US stocks sold-off on news of economic weakness in Europe plus word that US-China trade resolution would be delayed. Expectations for a US recession have now risen to 20%.
India cuts rates
Three months ahead of general elections, the new Reserve Bank of India (RBI) Governor Das surprised the marketplace with a rate cut of 0.25%, putting the Current Rate at 6.25%. No change had been expected. Headline inflation shows slowdown since June 2018, positioned below RBI’s target band of 2–6 % and provides signs of weakness. Official figures are questionable, however: real inflation is at 5.70%, the upper part of the target range.
The cut comes perfectly for India’s ruling party Bharatiya Janata, which is willing to boost the economy by providing more aggressive lending to support rural areas and expand tax cuts for middle-class families at the expense of larger borrowing and a wider fiscal deficit with expected lower borrowing costs. Investors have reacted positively, with sovereign bonds rallying. The long-term trend might go in the opposite direction, if the revenue deficit overreaches budget targets, especially for longer-end treasuries. INR is holding, about to finish the week in positive territory against the greenback (week-to-date: -0.31%; year-to-date: 1.81%). Currently trading at 71.06, we expect USD/INR to head along 71.80 short-term.