Thanksgiving holidays in the US kept markets relatively quiet this week, with cross-asset moves largely contained. Softness in the US dollar supported the Australian dollar to another weekly gain, with the AUD touching highs back to August to be around 4.5% above its October lows. Hawkish messaging from the RBA may have also been a factor, with markets raising the probability in their outlook for another hike in the cash rate.
The RBA's November meeting minutes highlighted the Board's decision to resume its rate-hiking cycle was prompted by upwardly revised inflation forecasts and broader economic resilience. There was also some discomfort about "a slight upward drift" in inflation expectations and that pricing power amongst firms could prove persistent. In a speech, RBA Governor Bullock noted that while inflation had declined substantially from its near 8% peak to just above 5% currently, this had mainly reflected eased pressures in global supply chains; returning inflation to the 2-3% target from here is expected to take time (forecast for late 2025), due to the assessment that inflation is increasingly "homegrown" and demand-driven, notably in services. Governor Bullock's message was essentially that restrictive policy would need to be maintained to cool demand in the economy, but that it would remain mindful of the employment side of its mandate.
Despite the UK government unveiling around £27bn of new stimulus measures in its Autumn Statement, the OBR projects the overall effect on the fiscal position will be minimal. The major items announced by Chancellor Hunt included tax relief to households and making what were to be temporary asset write-offs for businesses permanent. The cost of these and the other announced measures have been offset by improvements to the UK's fiscal position over the period out to 2027/28. The OBR attributes the stronger fiscal position to 3 factors: resilience in underlying economic conditions, higher inflation and further rises in UK and global interest rates. It remains to be seen how the Bank of England will take on board these developments, but earlier in the week Governor Bailey and other officials appeared before the Treasury Committee where the persistence of inflation was a key discussion point. Despite last week's encouraging inflation report, Governor Bailey pushed against market pricing for rate cuts in 2024.
The ''proceed carefully'' approach of the FOMC was encapsulated in the minutes of its previous meeting. Key observations were that risks to the economic and inflation outlook had "become more two sided" with rates sitting at a restrictive level; while members were mindful that tighter financial and credit conditions implied further tightening is likely to flow through and weigh on activity. However, upside risks to the inflation outlook had not abated, which continues to see the FOMC maintaining that additional rate cuts have not been taken off the table.
Similarly cautious at this stage of its tightening cycle, the ECB's Account of the October meeting outlined that the Governing Council elected to pause on increased confidence that rates were now "sufficiently restrictive" to bring inflation back to the 2% target. So as to avoid an "unwarranted loosening of financial conditions" a section of the Council emphasised that keeping the optionality to hike rates was important, depending on the incoming data. Speaking in Frankfurt, ECB President Lagarde said the Governing Council was now at the point where it can take stock of the effects of its monetary tightening on the economy.
