Markets were little changed this week; neither the bulls nor the bears taking the upper hand with the data flow limited and uncertainty continuing to cloud the outlook for economies. Stronger-than-expected data from China on the back of the reopening (Q1 GDP up 2.2%) was unable to boost Asian equities. In the US, Fed members' views have coalesced around a May rate hike followed by a pause, the length of that pause being the key question going forward. The ECB is set to continue hiking while labour market and inflation data in the UK has likely delayed a pause from the BoE. Next week's calendar includes Australia's Q1 CPI report - a crucial input that will either validate the RBA's pause or prompt the Board to hike again in May - Q1 GDP reports are out in the US and euro area, with personal consumption data also due in the US.
RBA leaving its options open
Matters pertaining to the RBA were front and centre in Australia. The minutes from the April meeting revealed that the debate between a pause or a 25bps rate hike was finely balanced. Ultimately, a pause in the tightening cycle was upheld to allow the Board more time to assess the incoming data and to wait on a revised set of economic forecasts to be prepared by RBA staff for the May meeting.
Post the April pause, Governor Lowe noted in his Press Club address that the Board had taken a strategic decision regarding rates whereby it was prepared to tolerate inflation coming back to the target more gradually than some of its central bank peers (especially those with single price stability mandates) in order preserve the gains made in the labour market. The April minutes indicated that a mid-2025 horizon for inflation returning to the target band - consistent with the current forecasts - was as patient as the Board was prepared to be.
In that respect, it would appear that an upward revision to the inflation outlook is the catalyst that would see the RBA start to hike rates again in May (or at subsequent meetings). That elevates next week's Q1 CPI report to an input that will be key to determining if rates are set to enter an extended pause or if they will need to move higher. At this stage, the message is that the RBA is leaving all options on the table and will respond to the incoming data.
Also this week, the government published the findings from the independent review of the RBA it commissioned in July last year. In summary, while the review recommends changes to the composition of the Board responsible for setting monetary policy, as well as other operational matters including a reduction in meetings (12 to 8) and regular post-meeting press conferences. the most important point is that the monetary policy framework - what the Board is tasked with achieving - is not set to fundamentally change. The review endorses the retention of the dual objectives of 2-3% inflation and full employment (but argues against a third overarching objective relating to prosperity and welfare being a direct goal for monetary policy), though it calls for greater transparency in how the Board is using its tools to achieve these goals.
Fed not at the end yet
A host of officials from the Federal Reserve spoke publically over the course of the week, the common theme indicating the FOMC remains minded to hike rates further in May. The likes of the New York Fed's Williams and the Atlanta Fed's Bostic said they were in favour of a May hike followed by a pause, while the Cleveland Fed's Mester in advocating for higher rates conceded that the tightening cycle was approaching its end. Markets are on board with a final hike in May, but they expect the pause to be short-lived with around 50bps of rate cuts priced in for the back half of the year. That is at odds with the extended pause the Fed has commuincated is the likely path after May.
Data to delay BoE hiking pause
Stronger than expected inflation and wage data in the UK looks likely to delay a pause in rate hikes from the Bank of England, with a 25bs hike fully priced for the May meeting. Headline inflation eased from 10.4% to 10.1%yr in March, falling short of the consensus forecast for 9.8%, while the core rate was unchanged at 6.2%yr (vs 6% exp). The peak for headline inflation came in October (11.1%), easing since then on the back of cooling goods inflation (14.8% to 12.8%yr in March), though it should now start to fall more rapidly reflecting the effects of the government's price cap on energy bills. However, services inflation at 6.6%yr remains around its highs and is yet to soften.
Meanwhile, the labour market remains in robust shape. Over the 3 months to February, employment surged by 169k, well above the consensus forecast (50k), which kept the unemployment rate low at 3.8% (vs 3.7%) and the pace of wages growth elevated at 6.6% (vs 6.2%). Services inflation and wages growth are the two key inputs the BoE has said it will react to if they point to the risk of persistent high inflation, making the May meeting an unlikely juncture to pause. The MPC will, however, have the benefit of updated forecasts at the next meeting to signal a shift in its approach is nearing, with inflation expected to fall sharply over the coming year amid a weak outlook for growth.
No trade-off for the ECB
While the ECB's March meeting took place as the strains in banking systems were unfolding, the published account of the meeting depicted a Governing Council that remained determined with respect to fighting inflation. The message delivered by ECB President Christine Lagarde back in March that there was no trade-off between financial stability and monetary policy was reiterated in the account. The prevailing view was that unless credit tightened in a material way, the inflation outlook called for further rate hikes. But there was a sense that the Council is preparing to slow the pace of hikes given the uncertainty around both growth prospects and the inflationary trajectory, reflected in the decision to move away from providing forward guidance for rate hikes in favour of a more data-dependent approach. .
