Thoughts

June 30, 2023 | 13:29

Are We There Yet?

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Ah, the famous question posed by little ones as the summer holidays begin. But it is not only coming from the backseat. Markets are wondering how much more tightening needs to be done to bring inflation firmly back to 2%. Judging by this week's panel discussion at Sintra, most of these central bankers haven’t reached that point yet.

Granted, most of the comments made by the likes of Fed Chair Powell and President Lagarde have been oft used: “our job is not done”, “we are data-dependent", and "we will decide on a meeting-by-meeting basis”. Governor Bailey seemed to go more off-script, but he was still hawkish. “I’ve always been interested that the market thinks the peak will be short-lived in a world where we’re dealing with more persistent inflation.” Even Governor Ueda plucked a dovish feather when he suggested that policy could be tweaked next year if inflation picks up further, as per their forecasts. He also noted how wages were starting to rise (“a good sign”), and that inflation expectations and the price-setting behaviour of businesses are changing.

But the data may prompt some changes in perspective. For example, the latest Euro Area inflation rates were encouraging, as the headline and core came in better than expected. Though the ECB has almost fully assured markets of a July rate hike, a September move, though bandied about by some uber-hawks, is still too far out and there will be two more CPI reports (July and August) to digest before that meeting. The BoE, with one of the highest inflation rates in Europe at 8.7%, likely has more to do than the rest. And the BoJ, which stands out with its feet firmly planted on the sidelines, seems to be wavering a little. It already started last year when then-Governor Kuroda raised the cap on 10-year JGBs. We wouldn’t be surprised if more tweaks are announced at the July meeting, as the latest inflation rates for Tokyo point to continued upward pressure.

And let’s not forget the RBA. It is getting there, but we still expect another rate hike on July 4, bringing the cash rate from 4.10% to 4.35%. Credit demand and job growth are still very strong, and 5.6% inflation, though at a 13-month low, is still well above the 2%-to-3% target. The debate will, once again, be between 25 bps and holding rates steady. (Will 15 bps finally make it into the discussion? Here's hoping... I'm not giving up.) It will likely be even more “finely balanced” than it was in June, but will tip over to the 25 bp hike camp. (Expect a more dovish tone, though.)

On the other side of the world, the PBoC announced (after the release of weak June PMIs) that it would add more support for the economy as domestic demand is still “not strong” and that it would implement “targeted, forceful monetary policy”.

In other words, we're not there yet.