India's central bank rate cut is likely to please Modi

India's central bank rate cut is likely to please Modi

The Bank warned that we could be set to see growth slump to its lowest level for 10 years in 2019 due to Brexit uncertainty, as it held interest rates at 0.75%.

He said: "The fog of Brexit is causing short term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business".

"Although many companies are stepping up their contingency planning, the economy as a whole is still not yet prepared for a no-deal, no-transition exit". A 5 per cent depreciation in sterling would lift inflation to 2.4 per cent by the end of 2021 - versus 2.1 per cent in the current projections - while a gain of that magnitude would drop the rate to 1.8 per cent.

Though the central bank has reduced its lending rate to commercial banks, transmission of policy rates has always been a concern.

But it said the growth hit was expected to be short-lived, with a recovery in expansion later in 2019 - though this is based on a Brexit deal being reached by March 29.

The BoE saw a fall this year in business investment and housebuilding, which have been weak in the run-up to Brexit, as well as a halving of the growth rate in exports, reflecting the global slowdown.

The bank's Quarterly Inflation report, released on Thursday, warned that Brexit was having a clear negative impact on the United Kingdom economy, saying that since the last Inflation Report, in November: "The further intensification of Brexit uncertainties, coupled with the slowing global economy, had weighed on the near-term outlook for United Kingdom growth".

'A period of softer growth domestically and in the rest of the world was likely to be prove only temporary, ' the Bank said.

Inflation was likely to fall below its target because of the global fall in oil prices in the coming months before bouncing back above 2 percent in a year's time. Policymakers predict inflation will rise this year but remain within the RBI's target range.

The BoE's wage forecasts were little changed with earnings rising by more than 3 percent a year over the next three years.

The bigger picture remains weak.

The bank said that productivity is recovering more slowly than it had thought and that the supply capacity of the economy had shrunk.

Rate rises would run counter to moves by other central banks.

The rupee on Thursday appreciated by 11 paise to close at 71.45 against the U.S. dollar after the Reserve Bank of India cut the repo rate and changed its policy stance to "neutral". In a widely anticipated move, it also shifted its policy stance from "calibrated tightening" to "neutral", suggesting more cuts could be on the horizon.

Assuming a smooth Brexit, policy makers reiterated that limited and gradual rate increases will be necessary.

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