Franklin Templeton Fixed Income talk Reserve Bank of Australia, RBNZ, Bank of Korea and People’s Bank of China
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Reserve Bank of Australia
(Not) a long pause
The RBA kept rates steady in April after having hiked on ten consecutive occasions by a cumulative 350bps. The central bank had suggested earlier that they would prefer being data dependent going forward and assess the impact of the tightening done so far. We however think that the domestic inflationary momentum is still strong to signal an end to the current hiking cycle. Employment data improved in February after declining in the previous two months, the unemployment rate fell back to 3.5% and the National Australia Bank (NAB) business conditions survey remained resilient. Confidence has weakened, though in line with the monetary tightening, but we think further hikes are necessary to bring inflation closer to the 2%–3% mark from the current sub-8% levels. We expect a terminal cash rate of 4.10% by Q3. Elevated inflation (including rents and utilities) rules out a near-term rate cut, in our view, especially as the economy will likely avoid an outright recession.
Reserve Bank of New Zealand
A tough balancing act
The inflation outlook has turned higher for 2023. Weather-related shocks like Cyclone Gabrielle have exacerbated these risks. The impact of the cyclone on New Zealand’s food prices is still emerging, prompting us to believe the aftereffects could linger. Even without the cyclone, the tightness of the labor market has stretched inflationary pressures further. Services inflation is turning sticky, and given that employment rose in February, the impact of monetary tightening so far has not translated into job losses just yet. This makes the case for a quick turnaround in inflation difficult; we now expect the country’s Consumer Price Index (CPI) to average just short of 6% in 2023. Growth has started to suffer, and the economy is already under a probable recession, while property prices have sharply cooled. The central bank cannot overlook the challenge of higher inflation becoming more normalized. We expect a terminal rate of 5.50% for the Official Cash Rate (OCR) by June, but the balance will be tricky as a quicker slowdown would prompt rate cut expectations. A sudden pivot is unlikely, but we expect a rate cut by early 2024.
Bank of Korea
Wait-and-see stance
After a cumulative 300 bps of rate hikes starting in August 2021, the BoK paused at its February 2023 meeting, albeit not unanimously. Although the central bank revised its growth and inflation projections for 2023 marginally lower, five members (out of seven in total) were open to a higher terminal rate (of 3.75%) in a clear hawkish tilt. Inflation retreated to 4.8% y/y in February (after an acceleration in January following utility price hikes). However, core inflation remains sticky at best (at 4.8%), even as growth measures have deteriorated on softer consumption and tech exports. Yet inflation is expected to maintain a downward adjusting bias due to base effects, averaging close to 3.8% in 2023. With this outlook in mind, we remain comfortable keeping the terminal rate at 3.50% currently. Another hike in April cannot be ruled out but will be contingent on the March CPI print. Further hikes are unlikely, as monetary policy remains tight for now. Contrary to earlier expectations, an immediate policy pivot has been ruled out by the central bank unless the 2% inflation goal is clearly in sight. We now expect rate cuts by the BoK to begin in early 2024.
People’s Bank of China
Policy hamstrung by deficient demand
With yet another 25-bp cut to the reserve requirement ratio (RRR), the PBoC continues to rely on quantitative tools over outright policy rate cuts to ease monetary policy. The latest RRR cut was aimed at replenishing bank lending capacity. Although China’s consumer spending and investment rebounded in the first two months of the year after COVID-19 restrictions were dropped in December, the strength of the recovery has underwhelmed. The recovery also remains uncertain given still-elevated unemployment, continued weakness in the property sector and declining exports weighing on industrial output. Headline credit growth, while strong, was likely due to policy pressures on banks, with more funding directed toward government-led entities. Meanwhile, private firms and households’ demand for credit has remained subdued. Rising mortgage prepayments and still-increasing household deposits suggest that demand deficiency has been the major hurdle for China’s recovery—also evidenced by downside surprises in inflation. Given insufficient domestic demand, we believe the PBoC will prefer to rely on quantitative tools (like RRR cuts) to sustain credit expansion. Room for policy rate cuts remains limited without a further downward adjustment to deposit rates, which are already at an all-time low.
Franklin Templeton Fixed Income (FTFI) Policy Rate Forecasts vs. Market Pricing
