3 September 2024
In a global economic environment where inflationary pressures threaten to overheat economic activity, monetary policy has been front of mind. For two of the world’s biggest central banks, the Reserve Bank of Australia (RBA) and The Fed in the U.S., there appear to be two totally different approaches to beating inflation.
In a global economic environment where inflationary pressures threaten to overheat economic activity, monetary policy has been front of mind. For two of the world’s biggest central banks, the Reserve Bank of Australia (RBA) and The Fed in the U.S., there appear to be two totally different approaches to beating inflation.
Fed Chairman, Jerome Powell has taken a more sledgehammer approach, front loading the rate hikes and reminding the market of its intent to combat inflation every time the market thinks they’re about to pause or pivot.
After adding another 75 basis points to the federal funds rate, markets are now focused on whether Powell hints at a lesser increase of 50 basis points in December or remain hawkish. RBA Governer Philip Lowe, on the other hand, has had a softer approach, being the first to pivot in October when the RBA first reduced the cash rate increase from 50bps to 25 bps. Now the RBA has just forecast the peak in inflation to be 8% from their previous forecast of 7.3%, signally more rate rises in the future.
With a strong macroeconomy, according to Westpac CEO, Peter King, the Reserve Bank is in a tough spot. “Now we’re in an environment where they (businesses) are putting up prices and spending is still staying pretty high. And so, the Reserve Bank’s got a pretty tricky trade-off.”
Philip Lowe and the RBA seem more concerned with the ultimate impact on the property market and its far greater correlation with interest rates than the U.S.
Indeed strong growth and high inflation is already hitting house prices and is forecast to continue this way into 2023 and beyond.
For both the Fed and the RBA, unemployment rates are at historically low levels in a labour demand economy that could ultimately result in wage increases.
Therefore, achieving the delicate balance of bringing inflation under control without hurting their economies is vital for both central banks.
Past performance is not a reliable indicator of future performance.
Sources:
- The Guardian, Reserve Bank predicts inflation to peak at 8% – the highest rate since 1990
- Financial Review, Westpac’s King has a grim warning for RBA
- smh.com.au, How high will interest rates go? We may be about to find out