The Australian dollar hit a 5-month low on Wednesday following comments made by the Federal Reserve chairman at an event in Washington that recent inflation data has not given policymakers enough confidence to ease interest rates soon.
Jerome Powell quashed hope for an imminent rate cut by suggesting that if higher inflation does persist, “we can maintain the current level of [interest rates] for as long as needed”.
US government bond yields rose in the immediate aftermath of Powell’s announcement as markets re-evaluated how quickly the US central bank may move to cut interest rates this year.
Moreover, the Australian dollar plummeted to a five-month low of US64 cents, sparking fears that the Reserve Bank (RBA) could also delay interest rate cuts.
Commenting on Powell’s assertions, AMP’s Shane Oliver said the RBA’s next steps will depend on the future movements of the Australian dollar.
“The combination of safe haven demand and rate cuts delayed in the US have pushed the US dollar up and the Australian dollar down to now just above $US0.64. So far, the fall in the Australian dollar has not been enough to really impact inflation forecasts as the Australian dollar is in the same range it’s been in for the last year. That said, if it broke a lot lower, say down to around US$0.60, it may become more of concern and possibly argue for a similar delay in RBA cuts here,” Oliver told InvestorDaily.
It’s been a long-held belief that the RBA is unlikely to move before its older sibling – the US Fed.
With the Fed now clearly pivoting away from subscribing to rate cuts in the near term, expectations in Australia are changing.
Earlier this week, Barclays’ research team said US CPI points to a delay in Fed rate cuts until at least September.
“With the March inflation data having more or less closed the opening for June, we now believe September offers the next best opportunity to cut …However, we think it is almost equally likely that the cut will be pushed out to December, especially if disinflationary progress proves slower than expected,” Barclays said.
Spatium Capital similarly believes that there’s a strong possibility that there is no movement on monetary policy in the US until at least December 2024.
Its forecast is based on a combination of factors including the upcoming US election.
“Since 1980, the Fed has either hiked or cut rates in an election year with the exception of 2012. The caveat however is that these hikes or cuts are less likely to occur once the respective candidates commence their formal debates ahead of the vote.
“So, the chances are if the Fed doesn’t make a cut before August, that there’s a strong possibility that there is no movement on monetary policy until at least December 2024. By which point we should be (re)familiarised with the leader of the free world.
“Adding additional complexity to the matter, the recent Labor market results and US corporate earnings have continued to exceed expectations, indicating that short-term US cuts are less and less likely.”
Irrespective of the US predicament, VanEck’s head of investments and capital markets, Russel Chesler, believes the market has overestimated the likelihood and speed of RBA cuts this year.
“The reality of a prolonged higher rates environment is becoming more apparent and this disparity between expectation and reality could create increased instability in the economy,” Chesler cautioned.
“From many perspectives, it seems the economy has been guided successfully into a soft landing, the question is whether we’re actually on the ground.”
According to Chesler, “inflation shocks are not out of view”.
“The risk of economic ‘breaks’ are heightened in this environment and the sometimes delayed, knock-on effects from geopolitical tensions also contribute to the likelihood of inflation spikes,” he said.
As such, while Chesler is confident Australia should avoid a recession, he believes the RBA will hold the cash rate at 4.35 per cent until at least 2025.
