Key Central Bank Updates: RBA and SNB Decisions Loom, US PCE Data in Focus
Last week, the spotlight was on the US Federal Reserve (Fed) as it made a significant rate announcement. In a decisive 11-1 vote, the Fed initiated its easing cycle by reducing the target for the federal funds rate by a substantial 50 basis points (bps), bringing the overnight rate down to 4.75-5.00%. This marks the first rate cut since early 2020, signaling a shift in monetary policy.
The Fed's decision has positively impacted equity markets, with the S&P 500 reaching a new record high of 5,733. Meanwhile, the US Dollar Index (USD) fell to year-to-date lows of 100.21, levels not seen since July 2023.
The primary driver behind the 50bps cut was the Fed's shift in focus from inflation to employment risks. The central bank emphasized that upcoming employment data will be crucial in determining the pace of future rate adjustments. With two more employment reports due before the Fed's next rate decision in November, markets are currently weighing a 50/50 chance of a 25 or 50bps cut, with a 38bps reduction priced in. Any weakness in labor data could sway the decision towards a more significant cut.
Central bank forecasts indicate that the Fed funds rate is expected to decrease by another 50bps by year-end, reaching 3.4% by the end of 2025, and further dropping to 2.9% in 2026, which is now considered the long-run neutral rate. Additionally, Fed members project unemployment to rise to 4.4% by the end of this year, while PCE inflation (Personal Consumption Expenditures) is anticipated to decline on both headline and core measures.
In contrast, the Bank of England (BoE) adopted a more cautious stance last week, voting 8-1 to maintain the Bank Rate at 5.00%. This decision was interpreted as a ‘hawkish hold’, leading to a reduction in rate cut expectations among investors and pushing the pound (GBP) to fresh year-to-date highs of US$1.3340, levels not seen since February 2022.
BoE Governor Andrew Bailey stated that while the central bank aims to lower rates gradually, inflation must remain subdued. Currently, OIS traders are fully pricing in a 25bps cut for the November meeting, with expectations of nearly 40bps in cuts by year-end. The upcoming meeting will also provide new economic forecasts from the BoE.
The strength of the GBP/USD is not surprising given the BoE's decision to hold rates and its slow and steady approach. The only dissenting vote came from external member Swati Dhingra, who favored a 25bps reduction.
Despite headline inflation remaining above the BoE's target of 2.0% (with August's YoY inflation at 2.2%), core and services inflation are still concerning, with the latter rising by 5.6% in the twelve months to August. The services sector constitutes about 80% of economic output, and a tight jobs market raises concerns about potential wage increases. Policymakers are seeking more evidence that inflation will continue to decline. Conversely, the restrictive policy is impacting economic output, with the BoE forecasting real GDP growth to ease to 0.3% in Q3 2024, slightly below the previous estimate of 0.4%.
The Bank of Japan (BoJ) also made headlines last week, with all nine policymakers voting to keep the short-term Policy Rate unchanged at 0.25%, a widely anticipated move. This follows a 15bps hike in July, aimed at addressing the risks posed by a weakening Japanese yen (JPY).
BoJ Governor Kazuo Ueda expressed a cautious outlook on global economic conditions, emphasizing the need for time to assess the economic landscape. Analysts are largely predicting January as a potential date for the next rate hike, coinciding with the release of updated economic forecasts. However, if the JPY depreciates further, the BoJ may act sooner.
Looking ahead, Monday will feature the S&P Global Manufacturing and Services PMIs (Purchasing Managers’ Indexes) for the eurozone, UK, and US. On Tuesday, the Reserve Bank of Australia (RBA) is expected to maintain its current stance, with only a 7% probability of a rate cut this week. Inflation data from Australia will be released on Wednesday, with CPI inflation projected to ease to 2.7% in August from 3.3% in July, which would be a positive sign for policymakers.
The Swiss National Bank (SNB) is also anticipated to announce a rate cut on Thursday, although there is uncertainty regarding whether it will be by 25 or 50bps. A rate reduction could alleviate pressure on the Swiss franc (CHF), which has strengthened against the USD and euro for four consecutive months.
Thursday will also see the final estimate for Q2 2024 US GDP, along with weekly jobless claims and durable goods orders data. Attention will turn to Friday’s PCE Price Index for insights into future rate decisions, with economists forecasting a YoY PCE inflation decrease to 2.3% in August from 2.5% in July, while core PCE inflation is expected to rise to 2.7% from 2.6%. The Fed's updated economic projections last week indicated a reduction in YoY PCE inflation forecasts for 2024 to 2.3% from 2.6%, and core PCE inflation projections were lowered to 2.6% from 2.8%.