Pantheon Maintains RBI Rate Cut Call For Early 2024

Pantheon still expects RBI cuts to start early next year, see below for more details.

"Its expectations for the rest of this year seem broadly reasonable to us, but we reckon that inflation will slow more noticeably and materially from Q1, closer to the mid-point of the Bank’s 2-to-6% target range. The mean-reversion in food inflation from the recent spike in tomato prices has plenty of room to run, and subsiding core trends at the margin point to underlying inflation falling potentially by a further 1.0pp, from 4.8% currently. It’s worth remembering that inflation expectations are rolling over and the economy is flush with inventories of finished goods. As things stand, we’re content with our base case that the MPC will start a gradual easing cycle in February next year, starting with a 25bp cut.

The MPC retained its GDP growth forecasts out to Q2 2024, expecting prints of 6.5%, 6.0%, 5.7% and 6.6%, in this order. This implies an average rate of 6.2% in the year to Q2 2024, which we think will be a stretch; our own forecasts imply an average of 5.3% during this period. Household spending intentions over the short- and long-run are now falling amid a deterioration in their balance sheets. Meanwhile, investment growth is set to moderate more noticeably in the coming quarters, due partly to the lagged impact of the RBI’s previous rate rises. Moreover, a historically large share of businesses are still of the view that they have more than adequate capacity, considering the state of future demand."