English-speaking Central Banks are slowly getting it
Wednesday was a big day for the English-speaking Central Banks. The Bank of New Zealand, the first of the Central Banks to realise inflation was becoming a significant issue, commenced tightening their monetary policy from 0.25 per cent on 6 October 2021. Wednesday was their sixth increase to 2.5 per cent, and it will be interesting to see the degree this crunches the New Zealand economy over the next few months.
The US printed an increase in inflation of 9.1 per cent, June 2022 on June 2021, up from 8.6 per cent in May 2022 on May 2021, and a new 41 year high. The probability of another 0.75 per cent increase to a range of 2.25 per cent to 2.5 per cent, at the next Federal Reserve Board Meeting in late-July just got higher.
And the Bank of Canada responded by hiking interest rates by a full one percentage point from 1.5 per cent to 2.5 per cent, the largest increase in 24 years. Governor Tiff Macklem warned of more hikes to come.
That leaves Australia and the UK well behind the pack at 1.35 per cent and 1.25 per cent, respectively. At their next Central Bank meetings of 2 August and 4 August, respectively, a minimum 0.5 per cent increase to 1.85 per cent and 1.75, respectively, is just about guaranteed. Neither the Australian or British Central Banks can get too far below the US official cash rate, or their currency will continue to decline against the US Dollar.
So far this year, the US Dollar/Australian Dollar exchange rate has declined from US$0.7250 to $0.6750 (-7 per cent), whilst the British Pound to the US Dollar has declined from US$1.36 to US$1.19 (-12.5 per cent). Currency depreciation is good for exports, it generally means imports become more expensive, adding pressure to an already slowing economy.
Official cash rate increases – date, level and short-term estimate (E)
Given the Reserve Bank of Australia (RBA) commenced their tightening cycle on 6 April 2022, exactly six months behind the Reserve bank of New Zealand (RBNZ), it is advisable to look over “the ditch” as a guide to how their economy performs over the balance of 2022. Recently released data reveals a 10 per cent decline in average house prices, in conjunction with a crunch in consumer confidence.