On Thursday night, the latest GDP growth released by the United States was much stronger than economists' forecasts, and the United States' real GDP in the second quarter was 2.8% annualized quarter-on-quarter, exceeding expectations of 2% and far exceeding the previous value of 1.4%; The core PCE price index in United States for the second quarter came in at 2.9% on an annualized basis, exceeding expectations of 2.7% and slowing significantly from the previous value of 3.7%.
Agency analysis believes that the GDP and PCE price index in the second quarter of this year show that the United States economy is expected to achieve a "soft landing", that is, inflation is steadily cooling while economic growth is stable.
This is good news for the Federal Reserve, which is working to achieve a soft landing for the economy and could start cutting interest rates as early as September.
With inflation slowing in the United States, the market has fully priced in a "Fed rate cut in September".
However, by September, with less than two months left before the United States presidential election, the correlation between the two major events has also become the focus of market attention.
Federal Reserve Chair Jerome · Powell have been under pressure from United States politicians, especially former President Trump. Trump recently said that cutting interest rates was "something they knew they shouldn't do." He has said several times that he does not want the Fed to cut interest rates before November because it would boost the economy under Biden.
In view of this, some analysts say that the Fed is increasingly likely to remain unchanged until the end of the year, rather than getting involved in the increasingly fierce United States election race.
And on the other side of the globe,
Australia's central bank is similarly in an awkward position.
Australia faces another rate hike
The Australian Bureau of Statistics is about to release the latest Consumer Price Index (CPI), and underlying inflation has exceeded Australia's expectations for nine of the past 12 months, putting pressure on the central bank to consider raising interest rates.
Arguably, Wednesday's release of the consumer price index will provide a scrutiny of the Australia Reserve Bank's credibility in fighting inflation and its strategy of raising interest rates less than other central banks.
Inflation in April and May came in higher than expected, and there is speculation that the more comprehensive June quarter data will once again exceed the Australia's optimistic expectations.
Inflation in the labor-intensive services sector, as well as in the rental and insurance sectors, has proven to persist.
Market economists expect the annual consumer price index to accelerate to 3.8% from 3.6% in the June quarter.
According to the average forecast of major market economists, the Australia central bank's preferred base inflation measure – the revised average CPI excluding the most volatile price items – will remain at 4%.
This is higher than the Bank of Australia's forecast in May.
The underlying inflation rate of around 4% also means that in the past 12 months, inflation has exceeded Australia's expectations in three quarters, in other words, Australian inflation has been growing at around 4% in the first six months of 2024.
With core inflation also reaching 4.1% in the second half of 2023, this would be a clear indication that Australia is in the midst of a structurally persistent inflation crisis.
Since the Bank of Australia's previous forecast, federal and state governments have also announced stimulus budgets that will inject about 2% of GDP or $50 billion in additional money into the economy over the next 12 months.
However, with politicians handing out cost-of-living subsidies with the sole purpose of artificially reducing inflation in the last six months of 2024, which will automatically push inflation higher in the second half of 2025 as these subsidies expire, we will get even weaker official figures over the next two quarters.
UBS economist George · Tharenou said the June quarter would be the 13th consecutive quarter that annual CPI was above the Australia central bank's 2%-3% target range.
"UBS has mixed views on Australia's 25bp rate hike in August, provided that CPI in Q2 is higher than Australia's forecast," he said. ”
UBS forecasts that the Australia central bank's preferred measure of underlying inflation (revised average CPI) will be 1% quarters and 4% for the financial year ending June 30.
Money market traders are pricing in a roughly 20% chance of a central bank rate hike at the end of the RBA's two-day committee meeting on August 6.
ANZ economist Adam Boyton said inflation could "slightly beat" the Australia bank's forecast.
“
We do not expect inflation results to be in line with our forecast of 3.9% year-on-year inflation, both of which (headline and baseline) will lead to a rate hike by the Australia bank, especially given rising unemployment, persistently weak GDP growth, low consumer confidence and deteriorating business conditions over the past year.
It is very difficult to say which number is likely to lead to the tightening of monetary policy by the Australia central bank.
”
Michael Malakellis, senior economist at KPMG, said any indicator above the Australia central bank's 3.8% annual headline inflation and underlying inflation forecast "will lead to strong guidance related to rate hikes".
If the headline CPI reading exceeds 4%, it is highly likely to trigger a rate hike unless the revised average remains unchanged or falls. ”
"Australia central banks will be very concerned about falling behind in the fight against inflation. The RBA has not raised interest rates as aggressively as other countries, but will be wary of allowing inflation to resume its upward trend or become more dangerous. ”
"Continued strength in the labour market, an unexpected rebound in household consumption and cumulative risks from fiscal policy, including tax cuts and temporary cost-of-living easing, have made the Australia central bank particularly difficult during this period."
Australian interest rates are lower than those of other countries overseas
Compared to other similar advanced economies, the Bank of Australia raised interest rates late and at a lower rate.
The Bank of Australia's cash rate is 4.35%, about 4 percentage points lower than the rate hikes in the United States (5.25% - 5.5%), New Zealand (5.5%), United Kingdom (5.25%) and Canada (5%, down to 4.75%).
With strong support from the Albanese Labor government and the Treasury, the Australia central bank committee has raised interest rates less aggressively since the start of the pandemic in an attempt to sustain job growth.
If the RBA does its part, it will immediately raise interest rates by 50 basis points to bring the cash rate to 4.85%, which is still below the level suggested by most economic models, including those on which Australia central banks have relied upon, the cash rate should have been raised last year.
Other major central banks around the world have raised their policy rates to 5-5.5% in 2023, and the Australia central bank has boldly decided not to follow suit as the central bank fears unnecessary job losses.
However, when the services inflation crisis is triggered by low productivity and unsustainably strong wage growth, which is a product of low unemployment, higher unemployment is precisely what prudent central bankers should be focusing on.
As it stands, the unemployment rate has risen from a nearly 50-year low of 3.5% last year to 4.1% in June, but it remains very low by historical standards.
Last month, about 50,200 people found work, although the unemployment rate has risen as more people enter the labor market in search of work.
A soft landing for the Australian economy is becoming increasingly difficult
After higher-than-expected inflation in March, April and May, Australia Bank Governor Michelle · Bullock admitted last month that the "narrow road" to a soft landing for the economy was "getting narrower".
"There is a lot we need to do if we are going to get inflation down to the 2%-3% target range, and the committee does need to be confident that inflation is continuing to move towards target and that the necessary steps will be taken to achieve that."
JPMorgan Chase & Co. economist Ben · Jarman said the Australia bank does not have a clear inflation "floor", but the quarterly CPI average of 1.2% (4.3% y/y) would be "hard to ignore".
"We have never cut rates in our 2024 forecasts and expect the Australia Bank to keep rates unchanged throughout the year and ease from the first quarter of 2025."
"The tightening bias has been appropriate, but we don't expect a rate hike in August because inflation is not a surprise and the economy is recovering. At this time, it is difficult to accelerate the return to the target without paying a considerable employment cost. ”
KPMG's Mr Maraquillis said rate hikes were a "blunt instrument".
"The Australia central bank will recognise that if inflation returns to its upward momentum and remains elevated, the longer the rate hikes drag on, the larger these rate hikes will need to bring inflation back into the target range."
"In this case, the narrow road to avoiding a recession while keeping inflation within the target range is fraught with bumps."
KPMG predicts that inflation will fall in the second half of the year, which means that the next interest rate change could occur in the first quarter of 2025.
epilogue
Australia's interest rate cut in 2024 is becoming less and less likely, but the probability of raising interest rates is increasing.
This means more pressure on people and central banks.
With the rising cost of living and heightened economic uncertainty, Australians are ready to rise to the challenge once again.
At the same time, the RBA will need to find a delicate balance between controlling inflation and maintaining economic stability to avoid inflation falling deeper into its woes.