Last week the RBI hiked rates 25 bps surprising the market. The rate hike was in response to heightened risk of inflation from rising oil prices and a rebound in the economy after a lull induced by the implementation of GST. The Indian central bank highlighted that rural and urban consumption have improved; industrial activity growth has accelerated; and services sector has remained resilient.

This week the big 3 central banks meet and each with a different agenda:

The Fed faces a robust economy and a tight labour market threatening higher inflation and is on track to a total of 3 rate hikes this year. The moderation in PMIs in the early part of the year has largely been reversed in both services and manufacturing.

The BoJ is facing a weaker economy with slowing inflation and wage growth. The BoJ may look beyond the current soft patch and regard the data as transitory but this would be risky and it is unlikely that the BoJ will send any definitive signal as to future policy. For the foreseeable future, the BoJ will be buying bonds at the current pace or at such pace necessary to suppress the yield curve. We believe that the BoJ will maintain the current pace of bond purchases for at least another year when a consumption tax comes into effect and which continued accommodation may be required to offset.

The ECB signalled last week that it might announce a more concrete agenda regarding the normalization of policy. The Chief Economist of the ECB expressed confidence that the current softness in the data was transitory and that growth was sufficient to warrant a review of QE. What complicates matters for the ECB is that the economy has slowed in the past 4 months and unlike the US and China, there has been no significant rebound. Add to this the political risk in Italy and Spain and there isn’t much latitude for the ECB to roll back accommodation. The ECB is constrained for technical reasons to end the current QE program but may replace it with open market operations. If so, the bond and FX markets have certainly not considered the possibilities.