To Raise Or Not To Raise Borrowing Costs?

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The most important financial updates will be coming from Oceania at the start of the week. The Reserve Bank of New Zealand (RBNZ) will announce its interest rate decision while, in Australia, the CPI inflation report for January will likely show how the country’s economy reacts to dropping figures.

RBNZ Interest Rate Decision

The RBNZ’s governing board is expected to announce its interest rate decision on Wednesday morning. For the first time regarding rates in many months, economists are split on whether the RBNZ’s policymakers will retain borrowing costs unchanged, or they will raise them. 

ANZ said they were “out on a limb” as they forecast the central bank would raise the official cash rate (OCR) by 25 basis points both on Wednesday and in the next board meeting scheduled on May 22nd. A report by TD Securities seems to agree with the suggested rate hike as it notes: “We now forecast hikes at next week’s meeting – 25 bps – and in May to take the OCR to 6%. Consequently, the eventual easing cycle is likely to be more aggressive with 200 bps of cuts.”

However, a Bloomberg poll, conducted last week, showed that all but two economists suggest the RBNZ could keep rates on hold. Kiwibank analysts wrote in a note that “we think the Reserve Bank will keep the cash rate unchanged at 5.50%, but they will continue to sort of beat the drum that inflation has not returned to target. There is some frustration within the Reserve Bank (on inflation)…and they will continue to be quite hawkish in their rhetoric. We are expecting them to be on hold, but they will continue to warn us if there’s any upside surprises maybe a hike is more likely than a cut.”

Australian CPI January 2024

The Australian Bureau of Statistics (ABS) is expected to publish January’s CPI inflation report on Wednesday. Market experts suggest that inflation is likely to tick higher in the first month of the year, reaching 3.5% on a monthly basis. It should be noted that the consumer price index came in at 4.1% in the final quarter of 2023 compared with a year earlier.

ING’s analysts told Reuters that “the markets got ahead of itself… I would say this is a time to take a contrarian view and that the inflation data over the next couple of months may well look considerably less helpful.” Dr Sarah Hunter, RBA’s chief economist, noted that “as supply shocks subside and inflation dynamics normalise, wages growth will again become the main driver of inflation, given that labour costs are, ordinarily, the largest cost for business.”

Japan National CPI January 2024

Japan’s Statistics Bureau announced that core CPI inflation fell for the third month in a row in January, reaching 2.0%, slightly higher than economists’ forecasts for a 1.8% figure. The core CPI reading sparked expectations that the Bank of Japan (BoJ) could end negative rates in April.

Capital Economics economists told Reuters that “the January CPI leaves open the possibility of the BOJ hiking its policy rate at the March meeting if preliminary Shunto results due a few days before the meeting are encouraging. We still consider an April hike more likely. For one thing, inflation will jump well above 2% in February as base effects from the launch of energy subsidies a year ago kick in, which would allow the Bank to tell a more compelling story that inflation remains strong.”

Goldman Sachs Forecasts 5 BoE Rate Cuts In 2024

Goldman Sachs economists suggest that the Bank of England will likely cut interest rates five times this year, a much more aggressive policy change when compared with other forecasts.

In their note to clients, Goldman Sachs analysts noted that “the first rate cut has not always been received positively by the markets. Growing growth concerns in 2001 and 2007, for example, more than offset the support that rate cuts provided.”

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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