Fixed Income Q2 2015: The return of easing in 2016

Tightening to come in the US, far off in the Eurozone

Trends in the developed economies remain diverged. Following some poor data releases in the US for Q1, we now see the first hike in the Fed funds rate in September/October this year. In contrast, policy will remain accommodative in the Eurozone and Japan for at least two years, sustaining the carry trade.

One hike and then two cuts in the MPR

We see one rate hike this year from the MPC in defense of the exchange rate and the current inflation objective. Thereafter we expect a change in nuance in the committee. This will place a little less emphasis on inflation and a little more on the policy rate for its perceived impact on lending volumes and growth. This could bring two rate cuts of 100bps next year.

Inflation back over 10%

The lagged impact of the two devaluations and a likely deregulation of fuel prices will push up inflation to 10.5% at end-2016.

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