Central banks deliver global surprises

Yasmine Raso

Senior Journalist, Financial Newswire

26 May 2023

GSFM’s Investment Strategist, Stephen Miller, has affirmed the surprise moves from several central banks made in the past few days as some manage a breakthrough and others stall.

The Reserve Bank of New Zealand (RBNZ) confirmed it would travel down a more “dovish” hiking path, “only” increasing its cash rate by 25 basis points to 5.5 per cent – well over the Reserve Bank of Australia’s rate by 165 basis points.

This comes as the RBNZ Monetary Policy Committee also suggested they have broken “through to the other side” with expectations of easing policy now in place.

“Financial markets were wrong-footed by the move thinking that after what looked to be an expansionary budget, the RBNZ would continue the hawkish tack that it displayed at the last meeting in April when it surprised markets with a hawkish 50 bp increase. However, at yesterday’s meeting the RBNZ MPC members even discussed the option of keeping rates unchanged but ended up voting in favour of one last increase by a 5-2 margin,” he said.

“The New Zealand dollar (NZD) fell around 1 per cent in the wake of the decision while bond yields fell sharply – 2-year yields fell circa 30 bps in the wake of the announcement, while 10-year yields fell circa 15 bps.

“The RBNZ Statement pointed to the notion that with the policy rate expected to stay at 5.5 per cent for around about a year, the MPC ‘is confident that… consumer price inflation will return to within its target range of 1-3 per cent per annum, while supporting maximum sustainable employment.’ Forecasts issued with the announcement of the decision show that the RBNZ forecasts inflation to return to that range in the second half of 2024.

“Given that it has been among the more hawkish of central banks, the fact that the RBNZ is among the first to signal the end of the tightening cycle should maybe not surprise too much.

“It will also inevitably excite speculation about whether other central banks are near or already at the end of that process.”

On the other side, the Bank of England (BoE) continues to struggle with managing inflation expectations after it recorded a higher-than-expected consumer price index (CPI) measure for March by 0.4 per cent.

“The CPI report comes after BoE Governor Bailey told a UK Parliamentary Committee that if there was ‘evidence of more persistent [price] pressures, then further tightening in monetary policy would be required’. There is now a clearly visible “smoking gun” of evidence,” he said.

The April CPI numbers almost certainly mean a further increase of at least 25 bps in the policy rate at the next scheduled BoE meeting on 22 June taking the policy rate to at least 4.75 per cent. Indeed, given the magnitude of the data surprise, and coming after the March figures also surprised on the upside by a considerable margin, it may be that discussions of a 50 bp increase make the June agenda. Peak policy rate pricing is now close to 5.25 per cent.”

The US Federal Reserve (US Fed) also released the minutes from its Federal Open Markets Committee (FOMC) meeting from 3 May, which suggested a pause in the rate hiking cycle was on the cards despite disagreement among several members.

“I expect the Fed will pause at the June meeting. Last week, Fed Chair Powell cited the lagged effects of the tightening to date as reasons why the Fed might “pause” and give their policies time to work.

“The big question regarding future inflation has been over the trajectory of services inflation. Here, there was some evidence of better news. The 3-month annualised rate of services inflation fell to 4.2 per cent, the lowest since October 2021.

“As mentioned, despite somewhat better news on the services front, the minutes indicate that at a minimum overall progress is not of a sufficient magnitude to effect a change in the Fed’s “higher for longer” path for the policy rate. The bond market despite tempering its expectation of policy rate cuts still expects close to 40 bps of cuts in the second half of this year and more than 100bps in the next 12 months. That prognosis is not totally implausible but in my assessment is certainly located at one end of the risk spectrum and is still some distance from the Fed’s prognosis.

“That pricing represents a widespread expectation of an imminent and meaningful recession.”