Interest Rate Timing Crucial: US Holds Steady, Will Australia Follow Suit?
Introduction:
Why the Rush for Australia When the U.S. Maintains Its Pace?
The "Interest Rate Hike Challenge" Amidst a Global Rate Cut Trend
First Cut Imminent! The Pace of Australia Matters
The Reserve Bank of Australia (RBA) announced its latest interest rate decision on Tuesday (May 7th), keeping the cash rate at its highest level in 12 years at 4.35%, suppressing the hawkish sentiment in the market.
Prior to this, the market had estimated a 43% chance of another interest rate hike in Australia in September, which is now only 5%.
It has been about half a year since the RBA has made any "moves" on interest rates.
This has led many to exclaim that the hope for a rate cut has been dashed!
And because the RBA failed to meet the hawkish expectations, the market interpreted the RBA's inaction as bearish news for the Australian dollar. On Wednesday (May 8th), during the European trading session, the Australian dollar/U.S. dollar slowly declined.
RBA Governor Michele Bullock stated at a press conference that the central bank had considered the possibility of raising interest rates, as the fight against inflation is not yet over, and it is too early to declare victory.But we observe that there are still some voices advocating for interest rate hikes in the market. For instance, Warren Hogan, the Chief Economic Advisor at Judo Bank, stated that Australia might be forced to raise interest rates three times before the end of the year. He believes that the latest meeting of the Reserve Bank of Australia's board indicates that it is preparing for a rate hike, with the first increase expected in August this year.
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However, let's consider the current situation in Australia. Does it really dare to raise interest rates?
The U.S. interest rates remain unchanged, so why should Australia rush?
First, let's compare the economic performance of countries that are doing well globally. Undoubtedly, the United States is still leading, with a faster economic growth rate and more significant inflation fluctuations. However, the latest statement from the Federal Reserve only suggests that high interest rate policies will continue for a longer period.
This means that, despite the strong momentum of the U.S. economy, the expectation for interest rate hikes is not clear.
It's important to note that, although Australia's economic performance is better than Europe's, it falls short when compared to the United States.
Economic data shows that Australia's economic growth is slowing down, unemployment is rising, and consumption data is weak. For example, Australia's unemployment rate increased by 0.1 percentage points in March 2024, from 3.7% in February to 3.8%.
Moreover, Australia's overall and core inflation for the first three months of this year have exceeded expectations, far above the central bank's target range of 2%-3%.
As a global monetary policy benchmark, every move by the Federal Reserve is closely watched. Last week, Federal Reserve Chairman Powell maintained the tone of lowering interest rates this year. The Federal Reserve's fund rate is currently in the range of 5.25%-5.5%, and it is expected to drop to 4.25% by the end of the year, indicating a 125 basis point cut for this year.Powell also acknowledged that the outbreak of inflation has weakened Americans' confidence that price pressures are subsiding.
The Reserve Bank of Australia (RBA) seems to be on a similar path. The RBA's governor, Philip Lowe, has previously stated that the central bank is in a data-dependent mode and will only begin to cut interest rates when it is confident that inflation is on a sustainable path back to its target.
Although the RBA does not publish dot plots or its own forecast trajectory for the cash rate, Lowe has previously indicated that the central bank does not need to wait for inflation to enter the range before cutting rates.
Nevertheless, she has repeatedly refuted speculation about easing policies, reflecting the RBA's forecast that inflation will not return to the target level until the second half of 2025.
So we have to ask, if even the United States chooses to keep interest rates unchanged, why should Australia, as a country with a less impressive economic performance, be in a hurry to raise interest rates?
In summary, predictions for interest rate cuts in Australia should fully consider the overall situation of the global economy. Under the current circumstances, the possibility of Australia raising interest rates seems not high, on the contrary, cutting interest rates may be more reasonable.
"Interest Rate Hike Challenge" under the Global Rate Cut Trend
In fact, central banks around the world in 2024 seem to have reached a tacit agreement - to cut interest rates. This shift marks a significant change in global monetary policy since the COVID-19 pandemic.
According to a report by Deutsche Bank, the number of global interest rate cuts has exceeded the number of hikes for the first time, signaling a relaxation of global monetary policy.
However, the pace of different countries is not the same, and they no longer simply follow the United States' lead. Europe currently has the worst economic situation, with a similar decline in inflation to Australia, so the European central banks have already begun to take action to cut interest rates.Daniela Hathorn, a senior market analyst at Capital.com, noted that the European Central Bank (ECB) is the most suitable among major central banks to start lowering interest rates. The ECB and the Bank of England are expected to begin implementing this policy from June this year. This decision reflects the prudent stance of European economies in the face of dual challenges of inflationary pressures and economic slowdown.
Among the major developed countries, only the Bank of Japan is expected to raise interest rates by at least 10 basis points, exiting negative interest rate policies, a decision that stands in stark contrast to the easing policies of other major central banks globally.
Meanwhile, emerging market countries such as Brazil and the Czech Republic have already begun to lower interest rates, with Argentina even expected to significantly cut rates by 3000 basis points this year. The bold moves of these countries will undoubtedly have a profound impact on global capital flows and investment patterns.
Australia is facing challenges such as rising unemployment, minimal inflation fluctuations, and weak consumer data, indicating a slowdown in economic growth. Therefore, the central bank may adopt interest rate cuts to promote economic stability and growth, especially considering similar actions have already been taken by other countries.
After experiencing low inflation, stimulus policies, and low interest rates during the pandemic, Australia is now facing high inflation and high interest rates, and the economy is emerging from this process.
According to a report by the Australian Broadcasting Corporation, Callum Pickering, a senior economist for the Asia-Pacific region at the global job website Indeed, also believes that despite a slight increase in the unemployment rate, Australia's labor market remains "extremely tight."
Blair Chapman, a senior economist at ANZ Bank, stated that the relatively tight labor market, coupled with high inflation and living cost pressures, means that many businesses are still in a difficult situation.
On the one hand, interest rate cuts can help reduce the financing costs for businesses and individuals, stimulating Australia's economic growth; on the other hand, excessive easing policies may lead to increased inflationary pressures. Finding a balance between stimulating the economy and controlling inflation will be a significant challenge for the Reserve Bank of Australia.
The first cut is imminent! Australia's pace is crucial.
The slowdown in Australia's economic growth has become apparent, making it difficult for the central bank to continue maintaining a policy of interest rate hikes. This situation will inevitably have an impact on future inflation, which is expected to gradually decline.Therefore, the Reserve Bank of Australia (RBA) should strike a balance in the pace of rate cuts, avoiding blindly following the United States' tightening policies, and not being too slow in response to Europe's actions.
As a result, the RBA has not raised its medium-term inflation outlook, but remains optimistic about the short-term inflation outlook. However, if there are data changes in the second quarter, this optimism may need to be readjusted.
In summary, the challenges facing the Australian economy require the central bank to respond prudently to ensure stable economic growth. In the future, we need to closely monitor the central bank's decisions and changes in various economic data, in order to adjust our expectations and response strategies in a timely manner.
As for when Australia will cut interest rates, or whether it will cut interest rates at all, my view remains unchanged.
I believe that from the second half of this year to the end of the year, the RBA may cut interest rates for the first time, and the move may occur earlier than in the United States.
When making any investment, please consider the applicability of the information contained in this article based on your personal investment objectives, financial situation, or personal needs, make decisions cautiously, and bear the risks yourself.
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