### 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.
The world's top central bankers meeting at Jackson Hole are concerned about lingering inflation challenges and uncertain policy tightening, which could lead to increased financial market turbulence and potential economic recessions.
The U.S. economy continues to grow above-trend, consumer spending remains strong, and the labor market is tight; however, there are concerns about inflation and rising interest rates which could impact the economy and consumer balance sheets, leading to a gradual softening of the labor market.
The majority of economists polled by Reuters predict that the U.S. Federal Reserve will not raise interest rates again, and they expect the central bank to wait until at least the end of March before cutting them, as the probability of a recession within a year falls to its lowest level since September 2022.
The Central Bank of Turkey is expected to continue its policy tightening, but doubts remain as to whether the pace of tightening will be sufficient, given the high inflation rate; meanwhile, the focus in the US is on the jobs market and the unemployment rate's impact on inflation, and pessimism reigns for the euro due to concerns about the ECB's ability to raise interest rates.
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.
The Federal Reserve's monetary tightening policy has led to a surge in mortgage rates, potentially damaging both the demand and supply in the housing market, according to Mohamed El-Erian, chief economic advisor at Allianz.
The Federal Reserve meeting in September may hold the key to the end of the tightening cycle, as markets anticipate a rate hike in November, aligning with the Fed's thinking on its peak rate. However, disagreement among Fed policymakers regarding the strength of the economy and inflation raises questions about the clarity and certainty of the Fed's guidance. Market skeptics remain uncertain about the possibility of a "soft landing," with sustained economic expansion following a period of tightening.
The gold market remains steady despite stable inflation pressures, suggesting that the US central bank may be able to end its tightening cycle.
The Federal Reserve is expected to hold interest rates steady this month, but inflation could still lead to additional rate increases.
Emerging-market central banks are resisting expectations of interest rate cuts, which is lowering the outlook for developing-nation bonds, as central banks in Asia and Latin America turn hawkish in response to the "higher-for-longer" stance taken by the Federal Reserve, currency pressures, and the threat of inflation.
The U.S. is currently experiencing a prolonged high inflation cycle that is causing significant damage to the purchasing power of the currency, and the recent lower inflation rate is misleading as it ignores the accumulated harm; in order to combat this cycle, the Federal Reserve needs to raise interest rates higher than the inflation rate and reverse its bond purchases.
The Reserve Bank of Australia (RBA) kept interest rates steady at 4.10% for a third consecutive month, suggesting that the tightening cycle may be over as policymakers gain control over inflation.
Poland's central bank governor justifies the large interest rate cut despite high inflation, stating that prices are stabilizing.
Bond traders are anticipating that the Federal Reserve will continue with interest-rate hikes, and next week's consumer-price index report will provide further insight on how much more tightening may be required to control inflation.
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 Federal Reserve faces the challenge of bringing down inflation to its target of 2 percent, with differing opinions on whether they will continue to raise interest rates or pause due to weakening economic indicators such as drops in mortgage rates and auto sales.
The Federal Reserve is expected to keep interest rates steady and signal that it is done raising rates for this economic cycle, as the bond market indicates that inflation trends are moving in the right direction.
The Federal Reserve will continue raising interest rates until inflation decreases, even if it means more people losing their jobs, according to CNBC's Jim Cramer.
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.
The Federal Reserve's measure of inflation is disconnected from market conditions, increasing the likelihood of a recession, according to Duke University finance professor Campbell Harvey. If the central bank continues to raise interest rates based on this flawed inflation gauge, the severity of the economic downturn could worsen.
The Bank of Ghana is expected to hold its interest rate at 30% due to pressures from the strong US dollar, as central banks across Africa grapple with balancing inflation control and economic growth.
The Federal Reserve's preferred measure of inflation decreased in August, indicating that efforts to combat inflation are progressing, although there are still price growth pressures that could lead to further interest rate hikes by the central bank.
The U.S. economy is experiencing turbulence, as inflation rates rise and U.S. Treasuries lose value, leading to concerns about whether Bitcoin and risk-on assets will be negatively impacted by higher interest rates and a cooling monetary policy.
Overall inflation has moderated recently in the United States and euro area, but core inflation remains sticky, creating a challenge for central banks trying to meet their inflation targets. Financial conditions have eased, complicating the fight against inflation by preventing a slowdown in aggregate demand. The combination of loose financial conditions and a monetary policy tightening cycle may have dulled the effectiveness of monetary policy. There are risks of a repricing of risk assets and potential vulnerabilities in the financial sector, emphasizing the need for central banks to remain determined in their fight against inflation.
Billionaire investor Bill Ackman predicts that the Federal Reserve is likely done raising interest rates as the economy slows down, but warns of continuing spillover effects and expects bond yields to rise further.
Federal Reserve officials are not concerned about the recent rise in U.S. Treasury yields and believe it could actually be beneficial in combating inflation. They also stated that if the labor market cools and inflation returns to the desired target, interest rates can remain steady. Higher long-term borrowing costs can slow the economy and ease inflation pressures. However, if the rise in yields leads to a sharp economic slowdown or unemployment surge, the Fed will react accordingly.
Ghana is facing an unprecedented financial crisis as protestors demand the resignation of the governor of the Bank of Ghana over the loss of $5.2 billion, causing depreciation of the currency and crippling inflation. The government's mismanagement and failure to repay loans have led to a surge in debt, forcing them to approach the IMF for assistance. The crisis undermines confidence in the financial system and the central bank's authority.
Underlying US inflation is expected to rise, supporting the idea that interest rates will need to remain higher for a longer period of time, as indicated by central bankers.
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.
Wall Street and policymakers at the Federal Reserve are optimistic that the rise in long-term Treasury yields could put an end to historic interest rate hikes meant to curb inflation, with financial markets now seeing a nearly 90% chance that the US central bank will keep rates unchanged at its next policy meeting on October 31 through November 1.
Federal Reserve officials are expected to pause on raising interest rates at their next meeting due to recent increases in bond yields, but they are not ruling out future rate increases as economic data continues to show a strong economy and potential inflation risks. The Fed is cautious about signaling an end to further tightening and is focused on balancing the risk of overshooting inflation targets with the need to avoid a recession. The recent surge in bond yields may provide some restraint on the economy, but policymakers are closely monitoring financial conditions and inflation expectations.
New Zealand's inflation rate slowed more than expected in Q3, indicating that the country's central bank may have reached the end of its tightening cycle.
Ghana's sovereign dollar bonds experienced a sharp decline after the government proposed debt rework scenarios that would involve a 30% to 40% haircut on the principal, disappointing investors. However, the bonds later recovered slightly, though they remained down on the dollar; Ghana is in talks with creditors to restructure its debts during its severe economic crisis, aiming for a coupon of no more than 5% and a final maturity of not more than 20 years on new bonds.
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.
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