Developments in the US and European banking systems remain squarely in focus, both by markets and now central banks. Meetings at the Fed and Bank of England (among others in Europe) saw rates continuing to be hiked but with indications that tightening cycles are near their the end in anticipation of weaker growth and a disinflationary impulse from tighter lending conditions.
Fed switches its focus
A 25bps hike by the Fed's FOMC brought the target range to 4.75 - 5%, a level that is likely to be around, if not already at, the peak for the cycle in the US. That indication was reflected in changed guidance: the expectation for "ongoing increases" in rates was replaced with a softer outlook that "some additional policy firming may be appropriate". In the post-meeting press conference Chair Jerome Powell made clear the stresses in the US banking system have altered the FOMC's thinking. In particular, he noted that the FOMC's reaction function would broaden to take into account the "actual and expected effects of tighter credit conditions" on the economy and on the labour market and inflation. Powell said those effects would essentially substitute for additional rate hikes.
The questions the FOMC is now contending with are how significant the credit tightening will be and how sustained its effects on the economy. Given this degree of uncertainty, it is understandable the summary of economic projections was little changed from December, with below trend growth expected this year and next and inflation gradually coming back to the 2% target in 2025. In the scenario, Chair Powell said the FOMC did not foresee the rate cuts markets have discounted for later in the year as a result of the banking stresses.
BoE keeps tightening
Topside surprises on the UK's February inflation outturns kept the Bank of England in tightening mode this week. However, the MPC downshifted the pace of this latest hike to a 25bps increase in a 7-2 analysis (2 voting for no hike) and retained its guidance for further tightening being contingent upon the signs of "more persistent pressures" in inflation. Bank rate now stands at 4.25%, up 400bps over the course of the tightening cycle and the sense is that a pause is imminent.
That may appear questionable given CPI on both a headline and core basis printed 0.5ppt above expectations in February at 10.4%yr and 6.2%yr respectively; however, the BoE continues to anticipate inflation pressures will ease sharply from Q2 as the effect of the government's energy price cap flows through to household power bills. Services inflation reaccelerated to 6.6%yr, though, here, the MPC noted wage pressures are now expected to slow more quickly following softer signals recently in its Decision Maker Panel surveys.
Over in Europe, the ECB's watchers forum saw a host of officials from the central bank speaking publically following last week's decision to hike rates by 50bps. President Lagarde in her opening address maintained the line that there is no trade-off between price stability and financial stability, essentially arguing that rates can continue to be hiked amid the current banking stress. But Presudent Lagarde then went on to say that it would be altert to ensuring that there is not a disorderly tightening of financing conditions.
Pause on the RBA's radar
While the RBA Board elected to keep hiking rates earlier this month, there were signs in the meeting minutes and in a speech from Assistant Governor Kent that a pause may get over the line in April. Although the minutes note the Board expected further tightening would likely be needed, it had also agreed to reconsider the case for pausing at the next meeting.
Given it already assesses the cash rate to be at a restrictive level and amid an uncertain economic outlook, the Board is becoming more cautious about the risk of overtightening. This gives recognition to the lagged effects of tightening sitting in the pipeline from 350bps of rate hikes since May last year.
Assistant Governor Kent highlighted the rise in the share of fixed-rate mortgages and the run-up in savings accumulated over the Covid period as delaying the full impact of rate hikes on the Australian economy. A few of key inputs that could shape the Board's thinking will come to hand next week with the monthly CPI, retail sales and job vacancy data for February all on the calendar.
