RBA Interest Rates On Hold, BoJ’s Ueda Says Future Rate Hikes Depend On Inflation

The Reserve Bank of Australia (RBA) held its interest rates unchanged, sticking to its restrictive monetary policy in contrast with the US Federal Reserve’s monetary policy easing campaign that started last week.

The pound hit a two-year high against the euro on Monday as PMI surveys showed the UK economy outperforming the eurozone this month. In the eurozone, data showed that economic activity slowed down in September putting in question the European Central Bank’s (ECB) ability to keep rates on hold after the October meeting.

RBA Interest Rate Decision

In Australia, the RBA decided to keep its borrowing costs unchanged after its governing board meeting. The Australian dollar surged against the US dollar by 0.4% on Tuesday morning, hitting a year-to-date record as Australia’s central bank announced leaving rates at a 12-year high.

In its post-meeting statement, the RBA’s policymakers vowed to keep monetary policy restrictive until inflation reaches desired levels. “While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. Data since then have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out,” was noted in the RBA’s statement.

The central bank’s head, Michele Bullock, said that rates are to remain on hold for the time being and suggested that “progress on underlying inflation likely remained slow in Q3.” Bullock expressed the opinion that the board does not see any see rate cuts in near term and added that policymakers are “prepared to respond in either direction depending on data.”

BoJ’s Ueda Says Rate Hikes Will Depend On Inflation Reports

In Japan, the Bank of Japan’s (BoJ) governor, Kazuo Ueda, implied that the central bank is in no rush to raise interest rates. Ueda noted that “we must conduct policy in a timely, appropriate fashion without having any pre-set schedule in mind, taking into account various uncertainties. We need to scrutinise market moves and overseas economic developments behind them in setting monetary policy. We can afford to spend time doing this.” As a result, the Japanese yen fell against the US dollar on Tuesday morning.

Eurozone Economy Declines In September

Data published by S&P Global and Hamburg Commercial Bank (HCOB) showed that economic activity in the eurozone dropped in September. More specifically, the euro bloc’s Manufacturing PMI fell to 44.8 from 45.8 in August while the Services PMI edged lower to 50.5. In total, the Composite PMI dropped from 51.0 in August to 48.9 in September.

Market analysts told The Guardian that “the eurozone numbers are not pretty, and they are providing some validation to those at the ECB calling for a quicker pace of rate cuts to ease the deceleration in activity. The economic rebound we saw in the first half of the year has completely fizzled out, and the return to contraction attests to the fact that ECB policy is probably more restrictive than necessary. Pricing for an October rate cut is ticking higher, and without a stabilisation in the growth outlook, there will be convergence to the more dovish rate path for the Fed - especially given growing signs of layoffs in the manufacturing sector. That’s not a good picture for the euro.”

Fed’s Kashkari Supports The 50 Bps Rate Cut

Neel Kashkari, member of the Federal Open Market Committee (FOMC) and head of the Federal Reserve Bank of Minneapolis backed up the Fed’s 50 basis points rate cut last week noting that “we have made substantial progress bringing inflation back down toward our 2 percent target and the labor market has softened, the balance of risks has shifted away from higher inflation and toward the risk of a further weakening of the labor market, warranting a lower federal funds rate.”

Kashkari, who was one of the FOMC members that voted in favour of the cut, said that there is little evidence that recessionary forces are building or that inflation could surprise to the upside.

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