The outlook for monetary policy among central banks

The Reserve Bank of New Zealand lifted rates another 25-bps to take them to 5.5% and so maintain the highest rates of the major developed nations.

In recent weeks we’ve heard various FOMC members express different views. It seems that most of the regional Fed presidents are still talking tough and keeping another rate hike firmly on the table. However, members of the Fed Board, including Chair Powell, are being more cautious. It more likely that the Fed will not lift rates again, but the persistence of high inflation could easily elongate the time that rates stay at a peak beyond the spring of 2024, which is our current estimate. The key, it would seem, is a decline in the Fed’s preferred measure of core inflation, which is non food and energy PCE services prices outside of housing.

More recently, the rate has been close to the middle of this range and Fed members would like to see this slip out of the bottom of this range in order to feel more comfortable that its policy tightening to date is sufficient to bring inflation back to the 2% target in time.

US PCE prices could provide some help on this front as we’ve already seen core CPI services prices excluding housing rise a modest 0.1% in the month of April and if the core PCE measure rises at the same pace it could leave the annual rate at 4.2%. That would be a decent fall from the 4.5% pace seen in March and could help convince the Fed – and the market – that rates will probably not need to rise again at the June meeting.

“If we add this to the very real prospect that the US will go into recession this year, then we think that treasury yields are most likely to ease down – once the debt ceiling crisis has passed. We believe that 10-year yields will be below 3% by the end of 2023 and very possibly below 2% by the end of 2024”, said Mr. Steve Barrow, Head of Standard Bank G10 Strategy.

Even if the Fed has finally reached the rate peak there are still many central banks that have not. Over the past time, the Reserve Bank of New Zealand lifted rates another 25-bps to take them to 5.5% and so maintain the highest rates of the major developed nations. And this despite the fact that the Bank is predicting one of the deepest economic downturns amongst the various countries.

Indeed, while many central banks hold out hopes that they can both defeat inflation and avoid a recession, the Reserve Bank of New Zealand appears far more realistic about its chances. Other central banks that are showing a clear hawkish bias include the likes of the ECB and SNB in Europe. The ECB’s problem is that core inflation has not yet stabilised, in the same way as it seems to have done in the US. This suggests further rate hikes and we continue to see another two 25-bps of hikes in coming meetings while the SNB is also within 50-bps of the peak in our view.

Some other central banks are harder to read as the level of guidance is not as strong. Here we would include the Bank of England. Fortunately, annual headline inflation is set to tumble this week from 10.1% to near 8% as the gas price hikes in April 2022 were not repeated this year. But core inflation, which excludes food, energy and tobacco should be stuck at 6.2%; or more than three times the CPI target of 2%.

Mr. Steve Barrow thinks the progress in reducing annual headline inflation won’t save the economy from another 25-bps rate hike at the next meeting. However, unlike the ECB, the Bank of England will only hike once more in this cycle. The future rate cuts could start sooner and be deeper than those we anticipate from the euro zone in 2024 and beyond.