Snippet from PIMCO in Australia on the Reserve Bank of Australia and Federal Reserve, highlighting 4 things both Banks see, which will lead to lower rates:

  1. when headline inflation is 8-9% and underlying inflation is at 5-6%, then of course, the inflation part of their mandate takes complete primacy. But now that inflation has moderated a lot and underlying inflation is around 3.5%, closer to target but not quite there, then there's greater balance between the inflation part of their mandates and employment part of their mandate. They want to lock in or preserve as much of the employment gains as they can that they've seen over the last couple of years.
  2. inflation expectations pretty well anchored ... have also stayed pretty stable.
  3. the breadth of inflation is diminishing ... the number of components driving the strength in inflation is reducing ... it's really down to things like housing, which is more related to supply side issues and not a cyclical representation of strong demand.
  4. the disinflation process has really stalled, but we haven't seen a reacceleration of inflation.

So I think they’re the four things that were common in both central bank meetings and that's what you need for central banks to really turn hawkish.

  • The probability of a hike is lower because they really are focused on preserving those employment gains.
  • So when you think about the three main scenarios of a rate hike, rates on hold, or rate cuts, the majority of the probability distribution is across the second and third scenarios.
inflation 06 March 2024