### Summary
Reserve Bank Assistant Governor Karen Silk says the Official Cash Rate is working despite sticky core inflation and record high employment.
### Facts
- 📈 Headline inflation has been falling for the past year, but non-tradable inflation has not declined significantly.
- 📉 Core inflation has been stuck at 5.8% for the past three quarters.
- 🏠 The average mortgage rate is steadily climbing towards 6%.
- 📊 There are signs that the OCR is working to restore balance in the economy, such as falling forward orders for business and decreasing durable spending.
- 💰 Demand for residential mortgages has fallen 32.9% in the six months ended March.
- 📈 The Reserve Bank expects non-tradable inflation to be lower in the coming quarter on an annual basis, but the quarterly rate may still be high.
- ⛽ Higher petrol prices could lead to tradable inflation having its hottest quarter in two decades.
- 🎯 The OCR mostly targets domestic, or non-tradable, inflation.
- 🎯 The Reserve Bank's forecasts have been criticized for missing its inflation forecast, but Silk defends the forecasts, stating that they are as accurate as any other local economic institution.
- 📆 The Reserve Bank has forecasted that headline inflation will be back in the target range one year from now.
- 🤔 There is doubt about whether inflation will drop below 3% in September 2024, as predicted.
- 💲 Another rate hike may be required to achieve the Reserve Bank's inflation target.
- 💱 Some economists believe that the economic downturn could be worse than expected, making a rate hike unlikely in the near future.
Japan's Ministry of Finance plans to raise its assumed long-term interest rate to 1.5% for the fiscal year 2024/25, up from the current record-low of 1.1%, indicating a potential strain on the country's budget as it is set to exceed 114 trillion yen ($782.64 billion).
Despite a slight increase in Canada's inflation rate last month, the Bank of Canada remains determined to bring it down to 2%, with the possibility of another rate hike being considered in September. However, some economists believe that the positive overall figures may allow the Bank to pause on rate increases without a significant negative impact.
Consumer inflation in Tokyo grew at a slower pace than expected in August, but the core figure, which excludes fresh food and energy costs, remained at its highest level in over 40 years, indicating that inflationary conditions in Japan remain high and putting pressure on the Bank of Japan to eventually tighten policy.
Financial expert Izuru Kato warns that a delay in the Bank of Japan's monetary policy normalization could result in steep interest rate increases and highlights the bank's concerns over inflation stabilization, government debts, and housing loans.
The spike in retail inflation has raised uncertainty for investors and savers, with expectations of interest rate cuts being pushed to the next fiscal year and the possibility of a rate hike. The Reserve Bank of India projects inflation to stay above 5% until the first quarter of 2024-25, and food price pressures are expected to persist. While inflation may impact stock market returns, gold and bank deposit rates are expected to remain steady.
Bank of Japan Governor Kazuo Ueda stated that underlying inflation in Japan remains below the bank's 2% target, leading to the decision to maintain the current approach to monetary policy, despite core consumer inflation staying above the target for the 16th consecutive month.
Former Bank of Japan board member Goushi Kataoka believes that the central bank can only shift away from its easy monetary policy once it has achieved its 2% inflation target sustainably, with wage negotiations in 2024 playing a key role in this process. Kataoka expects the Bank of Japan to gradually remove its yield curve control and negative interest rate policies before exiting its easy policy. He also emphasizes the importance of cooperation between the Japanese government and central bank in achieving the inflation target.
The Bank of Israel has maintained its benchmark interest rate but warned of potential rate hikes if inflation does not continue to moderate and the shekel weakens further. Despite signs of easing inflation, the central bank highlighted the possibility of higher borrowing costs in the future. The shekel has depreciated by over 8% against the US dollar this year, contributing to higher inflation. The bank sees the economy growing at a rate of 3% in 2023 and 2024 but warns of risks if the proposed judicial overhaul leads to increased risk premium and further devaluation of the shekel.
The Bank of Japan has signaled a possible early end to its easy money stance, with the central bank considering interest rate hikes and an early end to its bond-buying policy, which caught markets off guard and caused the yen to surge and Japanese government bond yields to reach a 9-year high.
The Wall Street Journal reports a notable shift in the stance of Federal Reserve officials regarding interest rates, with some officials now seeing risks as more balanced due to easing inflation and a less overheated labor market, which could impact the timing of future rate hikes. In other news, consumer credit growth slows in July, China and Japan reduce holdings of U.S. Treasury securities to record lows, and Russia's annual inflation rate reached 5.2% in August 2023.
Japanese long-term interest rates and the yen rose after Bank of Japan Governor Kazuo Ueda hinted at the possibility of ending the bank's negative interest rate policy.
The Bank of Japan's potential shift away from negative interest rate policy has ignited the Japanese Government Bond and currency markets, with the yen seeing its biggest rise in two months and the 10-year JGB yield reaching its highest point in almost a decade.
Inflation is expected to fall below the Federal Reserve's 2% target by late next year, despite a recent rise in consumer prices driven by increased energy costs.
The Federal Reserve faces a critical decision at the end of the year that could determine whether the US economy suffers or inflation exceeds target levels, according to economist Mohamed El-Erian. He suggests the central bank must choose between tolerating inflation at 3% or higher, or risking a downturn in the economy.
Speculation is growing that the Bank of Japan may be moving away from ultra-loose policy and negative interest rates, with its policy meeting being the highlight of the week in Asian markets.
The Federal Reserve's restrictive monetary policy, along with declining consumer savings, tightening lending standards, and increasing loan delinquencies, indicate that the economy is transitioning toward a recession, with the effectiveness of monetary policy being felt with a lag time of 11-12 months. Additionally, the end of the student debt repayment moratorium and a potential government shutdown may further negatively impact the economy. Despite this, the Fed continues to push a "higher for longer" theme regarding interest rates, despite inflation already being defeated.
The Bank of Japan is expected to maintain ultra-low interest rates and reassure markets that monetary stimulus will continue amidst China's economic struggles and the global impact of US interest rates.
The U.S. Federal Reserve kept interest rates steady but left room for potential rate hikes, as they see progress in fighting inflation and aim to bring it down to the target level of 2 percent; however, officials projected a higher growth rate of 2.1 percent for this year and suggested that core inflation will hit 3.7 percent this year before falling in 2024 and reaching the target range by 2026.
Central banks around the world may have reached the peak of interest rate hikes in their effort to control inflation, as data suggests that major economies have turned a corner on price rises and core inflation is declining in the US, UK, and EU. However, central banks remain cautious and warn that rates may need to remain high for a longer duration, and that oil price rallies could lead to another spike in inflation. Overall, economists believe that the global monetary policy tightening cycle is nearing its end, with many central banks expected to cut interest rates in the coming year.
Asia-Pacific markets fell as the Bank of Japan kept rates unchanged and noted a "moderate recovery" in the economy, while Japan's private sector activity expanded at its slowest pace since February and the country's August inflation rate remained above the BOJ's target for the 17th straight month.
Japan's core inflation remained steady in August, staying above the central bank's 2% target for the 17th consecutive month, signaling broadening price pressure and potentially increasing the case for an exit from ultra-easy monetary policy.
If the Japanese yen weakens beyond 150 to the dollar, the Bank of Japan could be forced to hike rates sooner than expected, which may lead to the unwinding of the yen carry trade and a return of Japanese capital to domestic bond markets, potentially triggering market volatility.
Japanese consumer inflation grew above expectations in August, potentially signaling a move away from negative interest rates as the Bank of Japan meets to discuss its monetary policy.
Investors are concerned about possible intervention as the yen approaches 150 per dollar, but the Bank of Japan may find it difficult to justify and achieve currency support due to the hesitation in exiting an ultra-easy monetary policy and the commitment to market-determined exchange rates.
Speculation that the Bank of Japan may abandon its negative rate policy raises concerns for Japanese homebuyers who rely on floating-interest mortgages.
The Bank of Japan is considering the eventual end of its ultra-loose monetary policy, with some policymakers discussing the conditions and timing of a future exit, according to a summary of opinions from their September meeting, leading to a rise in government bond yields.
The Reserve Bank of Australia (RBA) may cut interest rates in the second half of 2024, according to major bank economists, but the interest rate futures market does not anticipate any rate cuts until March 2025; historical data suggests that rate cut cycles following periods of high inflation have led to varying impacts on housing prices and unemployment, and it remains to be seen how the current economic conditions will affect these indicators.
The Reserve Bank of India (RBI) expects consumer price index (CPI) inflation to ease below 4 percent in fiscal 2024-25 if there are no further shocks and a normal monsoon, with the central bank rethinking rate cuts only if CPI inflation remains at or below 4 percent on a durable basis.
Global monetary policy is expected to transition from a period of low interest rates to rate cuts by the beginning of 2024, with only a few central banks anticipated to maintain steady rates, according to Bloomberg Economics. The forecast signals a turning point in the tightening cycle and suggests that the era of ultra-low rates will not return anytime soon. The report also highlights a slower pace of descent compared to the initial rate hikes that led to the higher borrowing costs.
Economists are adjusting their expectations for a rate cut in India to beyond the first quarter of fiscal year 2025, following a hawkish policy stance from the Reserve Bank of India (RBI) that emphasizes a 4% inflation target.
Japan's central bank is under pressure to reconsider its ultraloose monetary policy due to factors such as a weak yen, post-pandemic inflation, and the Russia-Ukraine war.
The Federal Reserve is expected to reach its 2% inflation target rate by early 2025 and is unlikely to raise interest rates in the near future, according to Mike Fratantoni, Chief Economist of the Mortgage Bankers Association. Fratantoni also predicts that the 10-year treasury rate will drop below 4% by the end of the year, leading to a decrease in mortgage rates over the next two years. The U.S. government's fiscal policy and debt limit impasse could continue to impact mortgage rates.
The Federal Reserve is expected to lower interest rates by the end of 2024, but the decline will be mild and likely to occur in the second half of the year, with the possibility of one more rate increase in 2023, according to policymakers and markets. The forecast for rate cuts is not as significant as the rate increases seen in previous years, with a projected decline of 1% in the Fed funds rate by the end of 2024. The Fed's own projections indicate short-term rates around 5% at the end of 2024, suggesting a slower trajectory for rate declines compared to market expectations. The Fed has scheduled eight meetings in 2024 to set the Fed funds rate, with the potential for rate cuts starting in June or later. The decision to lower rates may not happen until the summer of 2024, as the Fed has emphasized that it plans to cut rates gradually rather than making immediate cuts. The outlook for rates is based on the expectation that inflation will take more time to reach the Fed's target of 2% and that unemployment will increase slightly. The main risk to the rate outlook is a more severe recession in 2024, but the Fed's current focus is on addressing inflation. Recent data for 2023 has been positive, indicating that the economy may have avoided a recession. Overall, while interest rates are expected to decline in 2024, the decrease will be modest and delayed.
The Bank of England should have a 3% inflation target and the power to use negative interest rates in response to economic shocks, according to a leading thinktank. This would allow for a more effective and flexible response to future downturns, while also avoiding rising debt or austerity measures.
Japan's core inflation in September slowed below 3% for the first time in over a year but remained above the central bank target, maintaining expectations that policymakers will phase out ultra-easy monetary policy.
Federal Reserve policy makers should establish a longer-term vision for interest-rate policy instead of reacting aggressively to each data point, according to Mohamed El-Erian, chief economic adviser at Allianz SE. He warns that over-tightening monetary policy to reach the inflation target of 2% too quickly could cause damage to the economy. El-Erian hopes that the Fed keeps its benchmark interest rate unchanged for the rest of the year for the sake of economic stability.
Japan is expected to end its era of negative interest rates in the first half of 2024, which will have significant implications for world markets, particularly leading to more turbulence for US Treasuries due to potential fund repatriation by Japanese investors.
India's monetary policy committee's decision to reinforce the 4% retail inflation target does not necessarily mean that interest rates will remain high for a long period, according to two external members of the committee. The focus now shifts towards bringing inflation to the target level.
Federal Reserve Chair Jerome Powell stated that inflation is still "too high" and the path to reducing it will be challenging, with the Fed remaining committed to bringing it down to 2%. Despite some improvements, inflation remains far from the target, and the possibility of a rate hike in December or future meetings remains open. Achieving the Fed's inflation target will require sustained and constant decreases, which may not be possible until mid-next year. Higher interest rates will lead to increased costs for consumers, impacting their ability to make purchases and potentially causing cutbacks in other areas.
U.S. inflation slowdown is a trend, not a temporary blip, according to Chicago Federal Reserve President Austan Goolsbee, who believes the downward trend will continue and hopes that it does, while also expressing concern over rising oil prices and possible economic disruptions in the Middle East; Mortgage Bankers Association Chief Economist Mike Fratantoni suggests the Fed is likely done with interest rate hikes and may reach its 2% inflation target by early 2025, with a low probability of rate hikes in November or December; Philadelphia Fed Reserve President Patrick Harker believes interest rates can remain untouched if economic conditions continue on their current path, as disinflation is taking shape and the Fed's interest rate policy is filtering into the economy; Mortgage rates have been affected by the federal government's increasing spending and smaller revenues, leading to a heavier impact on mortgage rates this fall.
Reserve Bank of Australia (RBA) Governor Michele Bullock warns that the bank will raise interest rates again if inflation rises and does not return to its target range of 2-3% within a reasonable timeframe, emphasizing the need to closely monitor incoming data.
