Mizuho daily – Between (Inflation) Gum & Numb

By Vishnu Varathan, Head, Economics & Strategy | Asia & Oceania Treasury Department | Mizuho Bank, Ltd.,

Between (Inflation) Gum & Numb

With mounting evidence of sharp cost surges, the elephant in the room is “inflation gum”. Put  differently, whether inflation gets blown up  and turns out to be sticky!

Elsewhere, in worst hit economies such as India, policy-makers are trying to numb the pain. That juxtaposition of inflationary pressures gushing in whilst lingering economic pain begs support, in essence captures the policy dilemma faced by all; just to varying degrees.

US Services ISM numbers still lofty despite some pullback, but with unabating price surges in the components resonates with the ISM Manufacturing trend. And if reflected in strong jobs numbers, discomfort about how long the Fed will leave the QE tap on is hard to avoid.

Even an unambiguously dovish Fed is not numb to “inflation gum” effects. In which case, UST yields, despite the slight easing on softer ISM headlines, may be reanimated upwards.

Meanwhile, USD bears and “risk on” tendencies may be numbed as caution creeps in.

RBI Numbs Credit Pain Amplifiers

We had earlier flagged* three key pain amplification risks with respect to adverse economic impact from India’s devastating third wave. These were;

1.  multiplier effects through the grey economy, (given disproportionate pain at the lowest income/most vulnerable part of the economic spectrum;
2. banking sector/credit multipliers that amplify balance sheet risks, and;
3. ratings risk that set off negative growth-banking-fiscal-ratings feedback loop.

It is therefore a welcome relief that the RBI has stepped up to the plate to simultaneously incentivise term liquidity facility of INR500 billion for healthcare-related firms, set up a special 3-Y LTRO of INR100 billion for Small Finance Banks (SFBs) and extended credit incentives for MSMEs.

Ensuring that critical liquidity/credit made available, prioritised by sectors (healthcare) and the under-banked (MSMEs), alongside back-end funding for “last mile” SBFs, helps avert a financial contagion born out of credit seizure tipping a liquidity crunch into a solvency crisis.

Yet, the RBI being careful to resort to sweeping loan moratoriums shows acute cognizance of banking balance sheet stresses that predated COVID elevating “last straw” banking risks.

As welcome as the relief is, there are no illusions about being out of the woods as the RBI has no panacea to offer; only the ability to numb pain and constrained ability to steer away from the worst economic consequences from negative feedback loops/multipliers.

* Please see Mizuho Flash – India’s COVID Tragedy: Misdiagnosis & Maladies, 23 Apr 2021

BNM: No Cut

BNM will likely keep its policy rate unchanged, but maintain its dovish bias. Admittedly, new Covid-19 cases remain elevated, prompting extended  social restrictions into mid-May, there is little to suggest that an urgent need for further rate cuts.

For one, the BNM will rightly judge it optimal to defer to more targeted fiscal- healthcare coordination to tackle the outbreak; as economic shock derives from a healthcare emergency. And easier monetary conditions can neither start-up stalled business activity, nor can it incentivize better vaccine take-up. Unlike most countries in the region, Malaysia’s vaccine supply (procurement) is the lesser challenge than demand (getting people to register for it).

But what BNM stands ready to do is to provide liquidity and facilitate loan moratoriums and/restructuring; so as to ensure the pandemic does not set off a financial contagion. But for now, the increased fiscal latitude allowed by more buoyant oil prices and doubling down on efforts to broaden vaccine rollout means the BNM can pause to assess.

Complicating the  picture is the global upswing in costs, from commodities to logistics, that heighten latent  policy dilemma.

Source: Mizuho Bank Ltd