Central Bank Policies

RBA Announcement (Tue):

The RBA is expected to cut rates with money markets pricing an 86% probability the Cash Rate will be cut by 25bps to 4.10% and just a 14% chance for rates to be kept at the current level of 4.35%. As a reminder, the RBA provided no surprises at the last meeting in December where it kept the Cash Rate unchanged as widely expected and noted that some upside risks to inflation appear to have eased, while the Board is gaining some confidence that inflation is moving sustainably towards the target but also noted that underlying inflation remains too high and the outlook remains uncertain. The RBA also stated that the Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions and while underlying inflation is still high, other recent data on economic activity have been mixed, but on balance, were softer than expected in November and wage pressures have eased more than expected. Furthermore, the minutes revealed the central bank noted that policy needed to be "sufficiently restrictive" until confident about inflation and the Board had minimal tolerance for inflation remaining above target for too long. RBA Governor Bullock also stated at the post-meeting press conference that they need to think carefully about policy and need to see more progress on underlying inflation, as well as noted that she does not know if the RBA will cut rates in February and will have to watch data. This suggested that all options were on the table for February, while there has been a recent shift of the consensus heavily towards a cut with all big 4 banks in Australia now anticipating a cut next week given the recent inflation data as all CPI figures for Q4 printed softer-than-expected in which headline Australian CPI YY decelerated to 2.4% vs. Exp. 2.5% (Prev. 2.8%) and the RBA's preferred Trimmed Mean CPI YY softened to 3.2% vs. Exp. 3.3% (Prev. 3.5%).

FOMC Minutes (Wed):

At its January policy meeting, the FOMC kept rates unchanged at between 4.25-4.50%, as expected, in a unanimous decision. The statement showed a hawkish shift, removing a reference to inflation making progress towards the 2% target while still noting inflation remains elevated; Chair Powell claims it was language clean-up, used to shorten the sentence, and was not a policy shift. The statement also described the labour market as having stabilised at a low unemployment rate, contrasting December's assessment that conditions had eased. Despite this, the Fed maintained a balanced view on risks to employment and inflation and kept its data-dependent stance on future adjustments. On several occasions, Powell emphasised that the Fed is not in a rush to adjust its policy stance, even when asked about the prospects of a March rate cut. The Fed chair noted that recent inflation readings, particularly in shelter, suggest progress, but stressed that this is not guaranteed. He acknowledged uncertainty in forecasting due to significant policy shifts but reiterated that the Fed is in a good place to monitor the economy. Powell confirmed that the Fed is above its long-run neutral rate estimate, and is closely monitoring reserve levels, with no immediate plan to end quantitative tightening. Powell also stated that the Fed is awaiting clarity on potential changes in fiscal and regulatory policies under President Trump. In his semi-annual testimonies to Congress, Powell largely reiterated the themes he spoke about in his post-meeting press conference. However, since then, the aggregate impact of the latest US jobs data, CPI and PPI data resulted in a hawkish shift to the markets' implied pricing for Fed rate cuts; at the time of writing, money markets are pricing in just 34bps of rate reductions in 2025 and have the first fully discounted cut penciled in for October. It is worth noting the minutes are an account of the 29th of January meeting, and it will not incorporate information released after that (strong jobs data, hot CPI, and PPI data).