Central banks globally, most notably the US Federal Reserve (Fed) and the European Central Bank (ECB), are now proactively shifting towards easier monetary policy amid slowing global growth, ongoing trade tensions and below target inflation.
Recent communications from the Fed indicate they are on track to lower rates. While an insurance cut at the next meeting looks very likely at this point, action beyond this may be more data dependent.
A more accommodative Fed, weaker economic data and subdued inflation has also led to the ECB putting all its policy tools back on the agenda including potential rate cuts and the reintroduction of quantitative easing.
Closer to home we have seen some central bank action to try and stimulate inflation. The Reserve Bank of Australia (RBA) has paused post consecutive 0.25% cuts and are now monitoring data with a continued focus on the labour market noting they will deliver further cuts “if needed”.
The Reserve Bank of New Zealand (RBNZ) have moved from a “balanced” rate outlook to an acknowledgement that a lower interest rate may be required over time. In May, the Monetary Policy Committee delivered the first rate cut since November 2016 with a possible further cut to come in August.
Growth, inflation and employment are vital to central banks being successful in delivering their objectives. A lack of inflation and risks to achieving central bank targets are key to this shift towards more accommodative monetary policy.
With inflation currently struggling to meet targets, central banks may be willing, over the medium term, to allow inflation to run above their target objectives. Indeed, some central banks are currently investigating whether they should target an average inflation rate over time rather than an explicit fixed target.
Unemployment is low across NZ, Australia and major economies, but wage inflation has remained at low levels. As stated by the RBA, this may imply that the maximum sustainable employment level is lower than previously thought.
The combination of these two factors and others tends to suggest that the hurdle for interest rate cuts is lower than previously thought and the probability of lower interest rates for longer has increased which is our core expectation.