Central Bank Policies

Feb 16th, 2024

RBA Minutes (Tue)

The RBA will release the minutes from the February 6th meeting where it unsurprisingly kept rates unchanged at 4.35% and maintained its hawkish rhetoric as it reiterated that the board remains resolute in its determination to return inflation to the target and that a further increase in interest rates cannot be ruled out. It also repeated that returning inflation to the target within a reasonable timeframe remains the board's highest priority and although it noted that inflation continued to ease in the December quarter, it added that inflation remains high at 4.1%. Furthermore, it stated the Board needs to be confident that inflation is moving sustainably towards the target range and that inflation is still weighing on people's real incomes and household consumption growth is weak, as is dwelling investment. RBA Governor Bullock also stuck to the hawkish script during the press conference as she noted that everyone is focused on inflation and there is still more work to do with a little way to go to get inflation down. Bullock added that risk remains inflation expectations could drift further, and they are not ruling anything in or out on policy, while they need to be convinced on inflation before thinking of cutting rates. However, she provided a more balanced tone during her appearance before the House of Representatives Standing Committee on Economics a few days after where she reiterated the Board is focused on bringing inflation down and that they have some way to go to meet the inflation target with the inflation challenge not over. Bullock also stated the Board hasn't ruled out a further increase in interest rates but neither has it ruled it in, as well as noted that inflation doesn't need to be in the 2%-3% band for them to think about rate cuts and if consumption slows more quickly than expected, it will be an opportunity to cut rates.

FOMC Minutes (Wed)

At its meeting, the Fed left rates unchanged at 5.25-5.5%, as expected, but made key changes to its statement, which now reflects a more balanced outlook on rate cuts vs rate hikes. Its description of economic growth was upgraded, now describing economic activity as "expanding at a solid pace"; its reference to the US banking system being "sound and resilient" and its commentary that tighter financial and credit conditions will likely weigh on the economy were both removed. It added a line noting that the risks to achieving its employment and inflation targets were moving into better balance. The statement also removed guidance that "in determining the extent of any additional firming that may be appropriate" to a more dovish/balanced view that "in considering any adjustments to the target range", but it added a hawkish caveat that it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%." At his post-meeting press conference, Chair Powell said the policy rate was likely at its peak for this cycle, and it will likely be appropriate to begin reducing rates "sometime this year" if the economy evolves as expected; he offered the caveat that the Fed was prepared to maintain its current policy rate for longer, if needed. The Fed Chair said reducing rates too soon, or too much, could reverse the progress the central bank has made in lowering inflation, but at the same time, reducing rates too late could unduly weaken the economy. He judged inflation had "eased notably," and that risks to achieving the Fed's goals were moving into better balance. The Fed chief also added that low inflation readings in H2 2023 were welcome, but it needs to see continued evidence in order to gain confidence that it was returning to target. Powell stated that a March rate cut was not likely and was not policymakers' base case.

ECB Minutes (Thu)

As was widely expected, the ECB opted to stand pat on all three of its key rates. The initial policy statement passed with little in the way of fanfare, as the Governing Council said declining trends in underlying inflation had continued, and that past interest rate increases continue to transmit forcefully into financing conditions. At the subsequent press conference, President Lagarde noted that it was "premature" to talk about rate cuts, adding that the ECB will be data-dependent and not fixated on the calendar. On wages, Lagarde suggested that data was 'directionally good' and the Bank is not seeing any second-round effects. However, she followed up with a judgement that the ECB needed to be further along the disinflation process before it can be confident that inflation is moving back towards target sustainably. Given the lack of incremental developments at the meeting, and how markets are focused more on data points rather than stale ECB communications, the account will likely pass with little in the way of fanfare.