The Week Ahead
- This week was headlined by the Reserve Bank of Australia leaving the cash rate on hold for the first time since the hiking cycle commenced.
- In contrast the Reserve Bank of New Zealand surprised markets and delivered a 50bp hike.
- In the week ahead the labour market will be the key focus locally.
- Offshore US CPI data, FOMC Meeting Minutes and the Bank of Canada meeting will be the focus.
The focus locally this past week was on the Reserve Bank of Australia (RBA) Board Meeting. As we had anticipated, the RBA left the cash rate on hold at 3.60%. It was the first ‘on hold’ decision since the tightening cycle began in May 2022. We had felt leading into the meeting it was a line ball call by the RBA after a softer than expected February monthly CPI print, but stronger labour market data. The Governor’s Statement indicates that the decision to leave the policy rate on hold may not have been as close a call as we thought.
Forward guidance has further shifted in a dovish direction and 3.60% may be the terminal rate in this cycle. In the March Statement accompanying the Board decision it was stated that, “the Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target” . In the April meeting that sentence was changed to, “the Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.” (our emphasis in bold).
At a speech this past Wednesday the Governor also noted “the decision to hold rates steady this month does not imply that interest rate increases are over. Indeed, the Board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe.” We retain our central scenario that the terminal rate will be 3.85%. We believe the risk to our call is that the current 3.60% cash rate is the peak in this cycle and the next move is down. We continue to expect 50bp of easing in Q4 23 followed by a further 50bp of rate cuts in H1 24.
Across the Tasman, the RBNZ took the opposite approach at their April meeting. In a surprise move the RBNZ raised its cash rate by 50bp to 5.25%, compared to consensus of a 25bp hike. Our ASB colleagues now expect one more 25bp hike at the next meeting to take the cash rate to 5.5%. The move came as inflation remains too high and despite signs of weaker economic activity. The RBNZ also wanted to compensate for a fall in wholesale lending rates due to bank stability issues.
The week ahead will see the Bank of Canada meet. We expect the Bank of Canada (BoC) to leave interest rates on hold at 4.50%, for the second meeting in a row. There are clear signs that the BoC’s aggressive monetary policy is dampening demand. Combined with uncertainties generated by the US and European banking issues, we retain our view the BoC policy rate has peaked in the current tightening cycle.
CBA’s Global Economic and Markets Research (GEMR) team publishes a wide range of economic and financial research each week covering the latest data, trends, policy developments and topical issues in Australia and other major economies. To access these publications please visit the GEMR website.
Our Economic Expert
Belinda Allen has considerable experience as a financial markets economist. Belinda joined the Commonwealth Bank in 2017 but started as a graduate at CBA years ago. Her work primarily involves developing and communicating views on the Australian and International economies. Prior to joining the Bank, Belinda spent over 10 years at Colonial First State Global Asset Management, the Bank's asset management arm as a Senior Analyst in the Economic and Market Research Team. Belinda holds a Bachelor of Economics and Bachelor of Applied Finance from Macquarie University and has been awarded the CFA designation.