Central Banks’ diverging paths

By Glenn Dyer | More Articles by Glenn Dyer

The US Federal Reserve meets this week, and one thing is certain: after the surprise surge in US job numbers in May, the Fed won’t be following the European Central Bank and Bank of Canada in cutting its key interest rates anytime soon.

The addition of 272,000 new jobs was a shock, and even if the jobless rate hit 4% (3.96%, actually, when rounding up), that will have no impact.

US hourly wage growth hit 4.1%, up 0.4% in the month, double the expected rate, and US workers have enjoyed another month of real wage gains.

The number of unemployed was 6.6 million (remember there are still more than 8 million vacancies), and the jobless rate was 4% (a smidge under). A year ago, there were 6.1 million people unemployed, and unemployment was 3.7%, indicating some softening.

With the monthly consumer price inflation data released this week (as the Fed meets, in fact), along with producer price data and updated projections and the dot plot of interest rate guesses by Fed members, don’t expect any change in policy for quite a while.

The early forecast for headline CPI is for no change in April’s 3.4% rate, while core inflation could ease to 3.5% from 3.6%. That will not see a return of the rate cut early optimism.

But everyone will be watching the Fed’s dot plot and the number of rate cuts for the rest of the year. It was one cut in the March dot plot, down from 2 at the end of 2023.

So, if the Fed won’t cut, should the Reserve Bank look to cut its cash rate after this week’s cuts by the European Central Bank (ECB) and the Bank of Canada?

The ECB was the big decision, despite a rise in inflation last month and higher forecasts for this year and next, as well as more optimism and higher forecasts for eurozone growth.

The inflation forecast would have been enough to see the Reserve Bank here hesitate and then pull back from a rate cut, and the firmer outlook for growth would have helped make the decision final.

And yet the ECB has cut rates despite firmer forecasts for inflation and economic growth, unlike here in Australia, where inflation is higher but edging sideways and economic growth is weakening.

The ECB cut its main rate to 3.75%, down from a record 4%, where it has been since September 2023.

That was opposed by the head of Austria’s central bank, but he was in a minority of one; even the Germans wanted a rate cut. "Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady,” the ECB Governing Council said in its post-meeting statement.

In updated macroeconomic projections, ECB staff raised their annual average headline inflation outlook for 2024 to 2.5% from 2.3% previously.

Staff likewise lifted their 2025 forecast to 2.2% from 2%. The 2026 projection remained at 1.9%.

The European Central Bank sees slightly stronger economic growth in the euro area this year, with its latest staff projections suggesting a 0.9% annual growth rate in 2024, up from the 0.6% forecast announced in March.

Its growth projection for 2025 was taken down from 1.5% previously to a revised 1.4%. The outlook for 2026 was kept unchanged at 1.6%.

The ECB forecasts for next year and 2026 are much higher than our current growth — 1.1% in the March quarter after the revised 1.6% (1.5%) for 2023.

So, the ECB is willing to provide some rate relief, even if the outlook for inflation is a little less certain than a month ago and the growth outlook is restrained (though better than Australia’s).

The outlook for the US is similar, but the Fed is not willing to risk a rate cut because it would look like a reward for impatient markets.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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