Global rate dance: Will RBA and BoE follow the Fed's lead?

Despite a lack of progress in American inflation towards their 2% target, the Federal Reserve (Fed) decided to leave interest rates unchanged, maintaining them within a range of 5.25% to 5.5%. Fed Chairman Powell also declared that it was highly “unlikely” to vote for a hike in the next meeting.

Nevertheless, FOMC members require “greater confidence” that inflation is sustainably moving downward before considering a rate cut, which hasn’t occurred so far this year. Does this jeopardize the three rate cuts expected by the Fed in 2024?

The Reserve Bank of Australia (RBA) and the Bank of England (BoE) will both convene next week[1]  to decide on their monetary policies, and investors are eager to see their next move. Let’s take a closer look at what to potentially expect.

Tuesday 7th of May: Will the RBA hold rates for a fourth meeting in a row? (4:50 AM GMT)

​​Hopes for a near-term interest rate cut in Australia have been dashed by a double dose of recent conflicting data. March saw inflation figures come in hotter than expected, while consumer spending fell short of forecasts.

Despite mixed economic signals (higher-than-expected inflation and lower-than-anticipated consumer spending), a rate hike in April seems unlikely for investors. If the RBA were to raise rates, it would mark a historic 14th increase in two years, but the first since November 2023. The central bank's stance on inflation in upcoming meetings will be closely scrutinised by investors seeking clues about the future trajectory of interest rates.

Australian inflation is easing, but not as quickly as expected

The Australian Bureau of Statistics (ABS) released data on April 24th showing that inflation continued to slow in the March quarter of 2024. The Consumer Price Index (CPI) rose 1% compared to the previous quarter, a slightly higher increase than the 0.6% recorded in the December quarter.

Australia's inflation continued its downward trend, reaching 3.6% year-on-year in the March quarter of 2024. This figure is lower than the 4.1% recorded in the previous quarter and extends the streak of declining inflation to five consecutive quarters since December 2022, when inflation hit a peak of 7.8%.

The slowdown in inflation is proving to be more gradual than expected.

While year-on-year inflation fell to 3.6% in the March quarter of 2024, a decrease from the previous quarter, the pace of decline is stalling. Compared to March 2023, inflation still rose 3.5%, slightly higher than the 3.4% recorded in the first two months of 2024.

This presents a dilemma for the RBA. They must balance maintaining inflation within their target range of 2-3% with the potential negative impacts of continued interest rate hikes on the broader economy.

What are professional analysts saying now?

About the next potential rate cut, economists from Australia's "Big Four" banks - Commonwealth Bank of Australia (CommBank), Westpac, National Australia Bank (NAB), Australia and New Zealand Banking Group Limited (ANZ) - have all revised their predictions: they now anticipate the first rate cut to come in November 2024 or even 2025.

CommBank was the last bank among the “Big Four” to still anticipate a first rate cut in September with a total of 3 rate cuts expected in 2024: one in September, one in November and one in December.

While some banks believe inflation will ease enough to allow for rate cuts, others might be anticipating a slower decline in inflation or the need for the RBA to maintain a tighter monetary policy for longer. That's why cash rate predictions for 2025 are a bit different among the “Big Four''.

CommBank, Westpac, and NAB are the most optimistic, predicting a rate cut of 1% (four quarter-point cuts of 0.25%) in 2025, while ANZ is more cautious, forecasting only a 0.5% reduction (two quarter-point cuts).

Thursday 9th of May: BoE’s hawks vs doves clash over rate cut timing (11:00 AM GMT)?

Recent speeches from Bank of England policymakers have sparked debate regarding the timing of potential interest rate cuts now that interest rates are at their highest level in 16 years, at 5.25%.

But the central bank navigates a complex economic environment with stubborn inflation and sluggish growth. Additionally, it has to face increasing calls from the Conservative Party (Tories) to cut rates, despite the independence of the central bank in the face of political pressure.

On Thursday 2nd of May, the OECD published its Economic Outlook May 2024 in which it said that it expects the United Kingdom to face sluggish growth in the near term, with relatively sticky inflation.

GDP growth is projected to remain low at 0.4% in 2024, before picking up to 1.0% in 2025, mostly due to the easing impact of past interest rate hikes. This new forecast is a downgrade from the OECD’s prediction for the month of February in which it expected a growth of 0.7% in 2024.

On the inflation front, there are signs of easing.

Headline inflation, which includes volatile food and energy prices, is expected to continue moderating towards the target level. However, core inflation, which excludes these factors, is likely to remain elevated (mostly due to persistent price pressures in the service sector).

Forecasts suggest core inflation will stay at 3.3% in 2024 and gradually decline to 2.5% in 2025.

The OECD anticipates a potential easing of monetary policy starting in Q3 2024. This could see the main interest rate progressively reduced from its current peak of 5.25% to 3.75% by the end of 2025.

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