The Hindu Business Line : US economy not headed for stagflation: Standard Chartered

Mr Mann believes that the US is not headed for stagflation. He says that the Fed is likely to cut interest rates in Q3 and opines that the it will cut rates three times before the end of the year.

Mr Mann adds that the Japanese policy is expected to remain loose in the short to medium-term. Standard Chartered believes that the US will continue seeing slower growth and believes that a lower level for peak interest rates in the US is good news.

Excerpts of CNBC-TV18's exclusive interviews with Mr David Mann:

Data received over the past month or so points to declining manufacturing numbers, declining housing numbers, dangers in the subprime mortgage market but on the other hand continued upticks in inflation - the latest coming from the PPI and the CPI numbers on Thursday and Friday. Do all this point to a kind of stagflation environment emerging maybe a quarter or two quarters down the line?

No, I don't think this actually means that we are going into a stagflation environment. We are seeing slowing growth and at the end of the cycle, we also get a long lag between the peaking in growth and the peaking in inflation. So the key point to note is that here again, we see a lower level of peak for interest rates and inflation in this cycle compared to previous cycles in the US. We think that is good news - this means that the Fed can keep liquidity that much looser than would have been the case in previous cycles and therefore the potential for a bounce back, once we do start to get into rate cuts in the States in the second half would be much better as well.

So are we to understand that you are in the camp that expects a interest rate cut some time in the second half of 2007?

That's correct. We are actually expecting to see that Fed starts to cut interest rates from the third quarter of this year and actually go ahead with three cuts before the end of the year. It will be doing this in an environment where there will be clear signs that inflation pressures have peaked.

And then once we see that cutting underway, there will also be firm confirmation from the actual numbers themselves that inflation is also falling.