Central Bank Policies

June 14th, 2024

RBA Announcement (Tue):

The RBA is expected to keep the Cash Rate unchanged at its meeting next week with money markets pricing around a 97% chance for rates to be kept at the current level and just a 3% probability of a 25bps cut. As a reminder, the RBA unsurprisingly kept rates unchanged at 4.35% at the May meeting and reiterated that the Board remains resolute in its determination to return inflation to the target and is not ruling anything in or out, while it stated that returning inflation to the target within a reasonable timeframe remains the board's highest priority, as well as acknowledged that inflation remains high and is falling more gradually than expected. In terms of the central bank's projections, it raised its inflation forecasts for 2024 but trimmed its expectations for GDP and unemployment, while the RBA's forecasts assumed that rates would stay at 4.35% until mid-2025 which is nine months longer than previously assumed, although RBA Governor Bullock noted at the post-meeting press conference to not read too much into the technical assumptions regarding rate forecasts. The minutes from that meeting revealed the board considered whether to raise rates but judged the case for steady policy was the stronger one and agreed it was difficult to either rule in or rule out future changes in the Cash Rate. Furthermore, the board expressed limited tolerance for inflation returning to the target later than 2026 and it acknowledged that a rate rise could be appropriate if forecasts proved overly optimistic but noted that risks around the forecasts were judged to be balanced. The rhetoric since that meeting doesn't suggest much has changed as RBA Governor Bullock has noted the economy is weak which is showing up in consumption and reiterated, they are not ruling anything in or out on policy. She also commented that inflation is coming down but only slowly and the board won't hesitate to act on rates if inflation does not come down as expected although she still judges inflation risks as balanced and stated that Q2 inflation data will be important for monetary policy but not the single most important thing. Recent mixed data releases also support the case to remain on hold as GDP for Q1 disappointed with Q/Q expansion at 0.1% vs. Exp. 0.2% (Prev. 0.2%, Rev. 0.3%) and Y/Y growth at 1.1% vs. Exp. 1.2% (Prev. 1.5%, Rev. 1.6%), while Private Capital Expenditure for Q1 topped forecasts at 1.0% vs. Exp. 0.5% (Prev. 0.8%). Furthermore, monthly Weighted CPI for April was firmer-than-expected at 3.60% vs. Exp. 3.40% (Prev. 3.50%) and suggested less scope to loosen policy, while the latest jobs data showed an improvement as Employment Change in May beat estimates with an increase of 39.7k vs. Exp. 30.0k (Prev. 38.5k) which was entirely due to Full-Time jobs and the Unemployment Rate declined to 4.0% from 4.1% despite a slight increase in the participation rate.

BoE Announcement (Thu): 

Expectations are for the BoE to hold the Base Rate at its current level of 5.25%, according to all 65 analysts surveyed by Reuters with markets assigning a circa. 10% chance of such an outcome. As a reminder, the prior meeting saw Ramsden join Dhingra in calling for a 25bps cut, whilst the accompanying policy statement reiterated guidance that monetary policy needs to remain restrictive for sufficiently long. Since the prior meeting, headline inflation in April slipped to 2.3% from 3.2% (driven lower by declining gas and electricity prices), core declined to 3.9% from 4.2% and services ticked lower to 5.9% from 6.0% with the latter being a disappointment relative to the MPC's forecast of 5.5%. In the labour market, the unemployment rate nudged higher to 4.4% in the 3M period to April, whilst headline earnings growth remained sticky at 5.9% in the 3M/YY period to April. PMI metrics for May saw the services print slip to 52.9 from 55.0, and manufacturing rise to 51.2 from 49.1, leaving the composite at 53.0 vs. prev. 54. Rhetoric since the prior meeting has been lacking due to the purdah (pre-election) period inflicted by the UK general election. However, in the aftermath of last month's decision, Chief Economist Pill remarked that it is not unreasonable to believe that over the summer, the BoE will see enough confidence to consider rate cuts, adding that they could cut and keep the stance restrictive. Overall, given the worse-than-expected outturn for services inflation in April, the MPC is expected to hold fire on policy. As such, the focus will be on any tweaks to existing guidance on rates, however, at the time of writing there is not much to signal that the MPC will have enough confidence to do so – this could change however following the May CPI data due the day before the release. In terms of market pricing beyond next week, a September reduction is priced at around 85% with the first cut not fully priced until November and a total of 41bps of easing seen by year-end.