Hawkish holds from the Fed and BoE were the highlights from a flurry of central bank meetings this week as the BoJ and SNB also left monetary policy unchanged. The key message from the Fed that restrictive policy will likely be required for longer in order to return inflation to target sent the US 10-year Treasury yield to highs back to 2007, a major headwind for risk assets. The latest PMI readings underscored the growth differential that exists between a resilient US economy and weakness in Europe and the UK.
The Fed's decision to leave rates on hold in the 5.25-5.5% range this week was qualified by the signal that restrictive settings will be needed for longer, reflecting an outlook for stronger US growth. Updated economic projections showed FOMC members continue to see a final rate hike to a peak of 5.5-5.75% later this year remains in prospect, but the number of rate cuts implied by the 2024 projection has fallen to 2 (5-5.25%) from the 4 (4.5-4.75%) signalled previously. This revision has flowed through to drive the 2025 projection 50bps higher to the 3.75-4% range.
In the post-meeting press conference, FOMC Chair Jerome Powell said recent data had prompted Committee members to upgrade their outlook for US growth. Forecast growth this year was raised materially to 2.1% from 1%, with stronger growth now also seen in 2024 at 1.5% (from 1.1%) while the 2025 forecast remained at 1.8%. On the back of this, the unemployment rate outlook has improved, ending the year at 3.8% (from 4.1%) before lifting only modestly to 4.1% in 2024 (from 4.5%) and remaining at that level through 2025 (from 4.5%). Thus while the outlook is for stronger growth and lower unemployment - despite tighter policy - the inflation forecasts were little changed, expected to still be firm to the 2% target on headline (2.2%) and core rates (2.3%) in 2025.
Declining UK inflation paved the way for the Bank of England to hold rates steady at 5.25% at this week's meeting. In a very close call, a 5-4 majority of MPC members gave the green light to pause the hiking cycle, coming after a cumulative 515bps of policy tightening stretching back to December 2021. Meanwhile, the MPC set a new target of £100bn for balance sheet reduction over the coming year, an increase from £80bn over the past 12 months.
Headline CPI eased from 6.8% to 6.7%yr in August; however, it was the fall in the core rate from 6.9% to 6.2% - backed up by softer services inflation (7.4% to 6.8%) - that was likely the decisive factor with the majority on the MPC. Also key was the observation that rates had already been increased to a restrictive setting and the full effects of this on the economy had yet to play out. This portends an extended pause from the BoE. Although further tightening has not been ruled out, the statement noted the approach will be to ensure that rates are "sufficiently restrictive for sufficiently long to return inflation to the 2% target...".
More context around the RBA's tightening pause was provided in the September meeting minutes. Signs that tighter policy is weighing on demand and the lags of monetary policy were still to come are key factors keeping the Board on hold. Although the Board retains a tightening bias it is unlikely to be enacted. The Board assesses that the recent data flow "was consistent with inflation returning to target within a reasonable timeframe while the cash rate remained at its present level".