It has been a big week for central banks in Australia and the US.
The Reserve Bank of Australia revealed it was no longer “patient’ with waiting to see if inflation and wages rose as it had wanted to see and the Fed went all gung-ho on rate rises and their size and frequency and frightened investors many of whom had been demanding just that course of action.
The about face in Australia by the RBA was the big news and now it’s inflation first and a rate rise in June, according to most economists as the NAB and Westpac both brought forward the timing of their guesses for when the bank will lift rates.
They have been joined by the ANZ and the Commonwealth – a commonality of view which should normally worry us when it comes from the big banks.
“Critically, this week’s (RBA) board statement revealed a shift, removing any reference to a willingness to be ‘patient’, with a focus instead on assessing data over ‘the coming months’,” National Australia Bank chief economist Alan Oster said in an updated forecast on Thursday.
He reckons that by June the bank will have seen the consumer price index, the wage price index and the national accounts for the March quarter, which are expected to show that wage pressure is building and price rises have become more widespread.
Westpac chief economist Bill Evans has also brought forward his rate hike expectation from August.
“We have revised down our forecast for the unemployment rate, which is now expected to reach 3.25 per cent by year’s end compared to 3.75 per cent forecast previously,” Mr Evans said.
“That much tighter labour market in turn points to a stronger lift in wages growth in 2023 with a peak of four per cent now expected compared to our previous peak of 3.5 per cent.”
While US inflation is widely tipped to top 8% in next week’s March Consumer Price Index report, Australia’s rate will be around half that with a 4% plus increased forecast for the March quarter later this year.
And after pointing out the difference for a couple of months, it got all too much for the RBA this week which threw in the towel in trying to wait for wage rises to top 3% and switched its attention to inflation.
Australian rate rises will not be as large or as rapid as in the US and this week’s statement from the RBA makes it clear the bank will decide to run down its balance sheet in a decision expected in June (and follow other central banks in reducing the size of their balance sheets that had been swollen by the bond buying in the pandemic and into 2021.
In the US its back to the Fed rules and that’s OK after silly criticisms about how it was “behind the curve’ on tightening monetary policy to combat inflation.
Now it is very much on the front foot – rate rises of half a per cent can be expected as well as the balance sheet reduction at a much faster rate than forecast by the market
The $US95 million total in balance sheet reductions is about double the rate of the last reduction in the size of the Fed’s balance sheet, from 2017-19.
The decision to roll off mortgage securities will upset the huge housing market that has already seen rate rise pressures emerge amid record prices and demand.
In addition to the balance sheet discussion, Fed members and officials also discussed the pace of interest rate hikes ahead, with a distinct leaning toward more aggressive moves.
The minutes, though, pointed to potential rate hikes of 50 basis points at upcoming meetings, a level consistent with market pricing for the May vote. In fact, there was considerable sentiment to go higher last month.
“Many participants noted that — with inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level — they would have preferred a 50-basis point increase in the target range for the federal funds rate at this meeting,” the minutes said.
“Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified,” the minutes said.
Markets now expect the Fed to increase rates a total of 2.50% this year. The minutes noted, that, “All participants indicated their strong commitment and determination to take the measures necessary to restore price stability.”
So from now on speculation before Fed meetings will be much less aggressive and less speculative because traders will know there will almost certainly be an increase of 0.50%, at last for the next three or four meetings.
Don’t be surprised though that having gotten rates to around 2% as quickly as possible the Fed decides to sit and to see what the impact has been, especially on inflation and jobs.
Next week we get the March quarter reports from some of America’s major banks – Pre-Easter – JPMorgan, Goldman Sachs, Morgan Stanley and Citigroup all report, as will smaller banks like pNC and the Bank of New York Mellon.
Their views on the impact of the Fed’s hawkish approach will be fascinating to read – after all many of their cEOs and economists have called for such action.
In Australia the regional tiddler, Bank of Queensland releases its interim result as well on Wednesday. Its views will give us a glimpse of what the banks here feel about the looking rate rise from the RBA and the number and speed of increases.
