Singapore: The managing director of economic research house Asianomics Ltd, Jim Walker, expects the US and the UK economies to weaken in 2010. In an interview, he said the US is not in a position to raise rates in 2010 as it battles deflation. Walker added that the Reserve Bank may increase the repo rate by January-end. Edited excerpts:
The contrarian view is that the US will actually not raise rates or tighten at all through the entire calendar year 2010. That is a view which a lot of people in the West are increasingly beginning to endorse. Do you think they will be proved wrong?
No, I think that is exactly right. In fact, I don’t think the US will be in any shape at all to raise interest rates during the course of this year. We haven’t really begun to see to see the full force of deflation.... Deflation is certainly stalking the West. It’s stalking the US, Europe, and the UK. There is going to be much more in the way of deflation during the course of this year in the US and no opportunity for them to raise interest rates whatsoever.
Looking ahead: Asianomics managing director Jim Walker. Goh Seng Chong / Bloomberg
The real recovery, which we have seen, is more or less stabilization on the back of huge government spending. The government is not going to be able to produce the same trick again this year. So we would expect the economy to be weakening off during the course of 2010 and for interest rates to stay exactly where they are in the US and the UK.
What about India? The first salvo has been fired by China (where bank’s reserve requirements have been increased). India so far hasn’t moved and there is a growing belief at least among bankers in India that there could be a token cash reserve ratio (CRR) kind of a signal. But it will be quite a while before the real policy signal for hardening interest rates comes about. Where do you stand on that?
We will see something fairly decisive in January with the next credit announcement, not because of rising food prices and the Wholesale Price Index. That is largely a supply phenomenon and something that the central banks will not be reacting to. But it has seen liquidity conditions improving in India. There is plentiful liquidity around and economic activity has done very well and is continuing to move up.
The demand for credit is increasing again and with that certainly the historical nature of RBI would be to suggest we will actually get either a CRR or a repo rate increase as soon as the end of this month and then further there will be a series of steps. I don’t think there will be many because the external conditions are still going to be weak but I do think it will get two-three steps during the course of this year to tight monetary conditions in India.