Sobering Forward Guidance on Australian Monetary Policy
May 7, 2024
Analysts hadn’t expected a cut today in the Reserve Bank of Australia Official Cash Rate, which has been at a 22-year high of 4.35% since a 25-basis point rate last November, but the rate announcement‘s tone and Governor Bullock’s press conference proved surprisingly hawkish.
While inflation is easing, it is doing so more slowly than previously expected and it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks. The path of interest rates that will best ensure that inflation returns to target [of 2-3%] in a reasonable time frame remains uncertain and the Board is not ruling anything in or out.
While Australian wage pressure appears to have crested, service sector price inflation of 4.0% remains problematic, and Governor Bullock conceded that some inflationary risks such as higher global oil costs are not directly addressed by domestic monetary policy. The OCR was raised by 300 bps in 2022 and another 125 bps in 2023 from a pandemic low of 0.10% sustained from November 2020 to March 2022.
In financial market action overnight, the U.S. dollar rose 0.4% against the yen but held steady versus the euro. Ten-year sovereign debt yields fell 8 basis points in the U.K. and by 3 bps in the U.S., Japan, and Germany. WTI oil and gold prices are 0.4% softer, while Bitcoin climbed 1.4%. Most equity markets in Europe and Asia improved, including gains of 2.2% in South Korea, 1.6% in Japan, and 1.0% in the U.K..
Retail sales volume in the euro area posted an 0.8% advance in March, resulting in the biggest on-year rise (0.7%) in almost two years.
But Germany had more depressing news. Factory orders sank 0.4% in March and were 1.9% below their year-earlier level. Germany’s construction purchasing managers index slumped to a 3-month low of 37.5, dragging Euroland’s PMI in that sector to a 3-month low as well of 41.9. Both readings indicate very depressed construction activity due to tight monetary policy to contain inflationary pressure.
The British Halifax house price index posted a 1.1% on-year rise in April, their fourth on-year increase in a row. Separately, a 4.4% year-on-year drop in British same-store sales was the largest 12-month drop in 53 months. But the U.K. construction purchasing managers index jumped 2.8 index points to a 14-month high of 53.0 in April, highlighting one advantage the British economy holds vis-a-vis other major European economies such as Germany, France and Italy whose April construction PMI readings were just 37.5, 41.5 and 48.5.
Japan’s composite and service sector purchasing manager indices for April were each revised a bit below preliminary estimates but, at 52.3 and 54.3 respectively, signaled the fastest expansion in eight months.
Germany’s seasonally adjusted trade surplus averaged EUR 23.5 billion per month last quarter, up from a EUR 17.4 billion monthly average in 2023. But March exports and imports were 8.3% and 9.6% lower than a year earlier. The French current account deficit narrowed from EUR 20.2 billion in the final quarter of 2023 to EUR 17.6 billion last quarter.
Dutch CPI inflation in April of 2.7% matched the preliminary estimate and was its lowest of 2024. The year-on-year 0.8% drop in Austrian wholesale prices in April was the least negative in 13 months.
Filipino consumer price inflation of 3.8% last month was its highest since December but less than half the 8.7% peak rate touched in in January 2023. Chinese foreign exchange reserves sank $44.8 billion last month to a 5-month low of 3.201 trillion dollars.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Euroland retail sales and construction PMI, French current account, German factory orders and trade balance, Reserve Bank of Australia