Key insights from the week that was.
In Australia, the November RBA meeting minutes presented a detailed account of the Board’s deliberations and their assessment of the risks. The Board recognised recent evidence that pointed to lingering resilience in the labour market and domestic demand, alongside the fact that the moderation in underlying inflation is tracking a slower pace than expected. These developments have renewed concerns over inflation expectations, with the Board noting “growing signs of a mindset among businesses that any cost increases could be passed onto consumers”, a worrisome development given that only a “modest” increase in inflation expectations would make it “significantly” harder to return inflation to target.
Such observations were consistent with the Board’s eventual decision to raise the cash rate in November. However, they do not convincingly speak to a need to raise interest rates further. To justify another hike, further upside surprises for inflation and demand are necessary. We instead anticipate a deceleration in inflation and the labour market in Q4 and beyond, and so continue to expect the cash rate will remain at its current level until Q3 2024, when we forecast the next rate cutting cycle to begin.
In addition to inflation and the immediate policy outlook, in her speech this week, RBA Governor Bullock also outlined a number of key developments underway at the RBA to improve the Board’s engagement with staff and the RBA’s communications. RBA Governor Bullock also appeared on a panel with Productivity Commission Chair Danielle Wood. Productivity was a key theme and is also the topic of Westpac Chief Economist Luci Ellis’ weekly essay.
In the US, the FOMC released the minutes of their October/ November meeting. Members noted a “further softening in labour market conditions” is necessary for the Committee to feel comfortable inflation will return to target. After the meeting, evidence of such a turn was provided by the October employment report, while the subsequent downside surprise on both headline and core inflation are additional steps in the right direction. Looking ahead, liaison reports of businesses finding it more difficult to pass on price increases to consumers point to a further softening in demand and inflation which, in time, should justify our and the market’s expectations of around 100bps of US rate cuts through 2024.
While yet to receive equal treatment, let alone priority, downside risks to activity are clearly on the Committee’s radar. The cumulative impact of rate hikes are yet to be felt, and “persistent changes in financial conditions could have implications for the path of monetary policy”.
Across Europe, the UK and Canada, promising data on inflation and weak activity growth has also seen markets recently price in rate cuts from mid-2024, in effect easing financial conditions. Yet to be convinced the danger has passed, central bank authorities were therefore kept busy this week emphasising that rate cuts are currently not on their horizon.
Of particular note, after Canadian inflation eased to 3.1%yr in October from 3.8%yr in September, Bank of Canada’s Governor Macklem noted that the “excess demand in the economy that made it too easy to raise prices is now gone” – a statement that alludes to the removal of upside risks for inflation, but not enough progress to begin considering rate cuts.
In the UK meanwhile, Bank of England Governor Bailey appeared before a Treasury Committee. Though Bailey indicated that rates were at the top of the “table mountain”, the Committee are still wary of upside surprises given services inflation’s momentum and strong wage growth. Communication during the session therefore contradicted market pricing at the time for a rate cut in the first half of 2024.
