In its latest Central Bank Watch report, Franklin Templeton notes that the RBA turned less hawkish at its March 19 meeting but maintained that it is “not ruling anything in or out,” which they view as not dropping its tightening bias altogether.
The Franklin Templeton Fixed Income team notes “RBA’s meeting minutes indicated the same. Growth has slowed, as evidenced in gross domestic product (GDP) reports with the RBA confirming that private consumption remains particularly weak.
“But additional fiscal easing in the May 14 federal budget on cost-of-living pressures as well as the Stage III tax cuts, which will be implemented from July 1, should lift spending in the second half of 2024, in our view.
“Labour data continues to show signs of tightness, with the unemployment rate crawling back to 3.7% from 4.1% previously, despite stable participation rates. This will give credence to the RBA’s view that labour-market trends lend support to the goal of reaching the inflation target by the end of 2024 (we expect the unemployment rate to stabilise close to 4% levels).
“Inflation has consistently moderated, but as is the case elsewhere, goods disinflation has led to this decline, whereas non-tradeable inflation remains sticky. So, the battle is not entirely won, which is what the RBA will continue to reiterate through the coming months.
“We expect a move only in the fourth quarter once the impact of fiscal easing on growth is ascertained, and inflation and labour trends are more stabilised.
“A quicker loosening of the labour market could bring forward cuts, but that is not our baseline view,” notes Franklin Templeton.
The Franklin Templeton Fixed Income Central Bank Watch is a qualitative assessment of the central banks for the Group of Ten (G10) nations plus two additional countries (China and South Korea).
Each central bank is scored on three parameters: Inflation Outlook Perception, Quantitative Easing/Liquidity Management Programs, and Interest Rate Forward Guidance. Each parameter can be scored from a range with a minimum of -2 (dovish) and a maximum of +2 (hawkish).
The methodology for scoring compares the latest monetary policy statement/press statements with prior ones to see how the language and tone regarding each of these parameters may have changed over time. The scores are ultimately aggregated for each central bank, with a final FTFI score ranking each from -6 (for most dovish) to +6 (for most hawkish).
The report also provides one-year ahead policy rate expectations and compares their rankings and expectations with market implied policy rates to evaluate how the difference between their expectations/rankings and market expectations/rankings.
Other key highlights from the report:
Cuts are coming: Although most developed market (DM) central banks remain in a holding pattern, most signalled a willingness to cut interest rates. Uncertainty remains regarding timing, but we expect the European Central Bank to cut as early as June, followed by the Federal Reserve and the Bank of England. However, the stickiness of inflation and the resilience of growth will determine easing.
Swiss National Bank leads the charge: A downgraded inflation outlook and a strong currency prompted an unexpected rate cut from the SNB in March. The People’s Bank of China should continue to rely on liquidity injections, rather than outright rate cuts in the near-term. The Bank of Japan will likely be the only central bank to proceed on a tightening trajectory as a wage-price virtuous cycle gathers momentum.
Inflation dynamics remain uncertain: Many central banks have attributed slowing inflation to an unkinking in supply chains and, therefore, a fall in goods and energy prices. With labour markets and wages remaining resilient, most central banks will likely want further evidence that inflation is on a sustained downward path.