RBA Interest Rates On Hold, Doesn’t Rule Out Hikes

After a week packed with important financial events such as interest rate decisions by some of the world’s major central banks, this week’s calendar is expected to be light. The Reserve Bank of Australia (RBA) announced its decision to keep borrowing costs unchanged as it was anticipated.

The US dollar strengthened against the British pound, hitting a two-month high, on Monday as Jerome Powell pushed back expectations regarding an interest rate cut after the Fed’s March governing board meeting.

RBA Interest Rate Decision

The RBA’s board didn’t deliver any surprises as it kept the central bank’s Official Cash Rate (OCR) on hold as expected by economists. As the Australian economy faces high costs of living, some analysts suggest that there is not too much space for the RBA to raise borrowing costs further.

The Australian central bank’s Governor, Michelle Bullock, said that she doesn’t rule anything in or out on monetary policy and added that the bank perceives risks as balanced while noting that it is actively seeking data that confirms a return of inflation to the target level.

Economists at the National Australia Bank (NAB) wrote in a report that the post-meeting statement doesn’t indicate any rate cut coming soon. “We interpret this as low probability of a cut in H1 2024, but a cut in H2 2024 is consistent with inflation at target by mid-2026 on the RBA’s forecast,” they noted.

US ISM Services PMI January 2024

The US Services PMI rose to 53.4 in January according to a report released by the Institute of Supply Management (ISM) published on Monday. Market analysts at ISM said in the report that “the overall growth rate increase in January is attributable to faster growth of the New Orders, Employment, and Supplier Deliveries indexes.”

The ISM survey showed that “the majority of respondents indicate that business is steady. They are optimistic about the economy due to the potential impact of interest rate cuts; however, they are cautious due to inflation, associated cost pressures and ongoing geopolitical conflicts."

March Rate Cut Unlikely Says Fed Head

The Fed’s head Jerome Powell told CBS news reporters that the March Federal Open Market Committee (FOMC) would be unlikely to result in rate cuts as the board would not be confident enough to proceed. Powell acknowledged that there has been progress in regard to inflation but stressed that more persistent inflation figures could impact the timing of rate adjustments.

The Fed’s leader suggested that a rate cut could take place earlier than anticipated if labour market figures got weaker or inflation numbers fall “really persuasively.” Asked about the US economy projections, Powell noted that he doesn’t see elevated possibility of a recession, while adding that China’s economic issues could have an effect on the US economy but not a large one.

Drawing strength from Powell’s remarks, the US dollar hit a two-month high against the British pound on Monday.

OECD Interim Report: US Rate Cuts And UK Price Pressures

The Organisation for Economic Co-operation And Development (OECD) published its interim report at the beginning of the week. Analysts at the OECD forecast US CPI inflation of just 2.2% in 2024 and 2% in 2025, among the lowest rates in the G7.

The OECD report predicts the UK would have to navigate the G7’s highest inflation rate, at 2.8% this year and 2.4% in 2025. Regarding the US inflation, OECD economists said that “the big issue is still inflation and it seems to be coming down...consistently. We are not out of the woods yet, and there is a fair way to go.” According to them, the US is likely to register the largest economic expansion (+2.1%) while Germany’s GDP growth is expected to be anemic.

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