- The US Federal Reserve has increased interest rates seven times in its current hiking cycle, and is expected to tighten more over the next 18 months.
- At the same time, financial markets think the RBA and RBNZ will only be able to lift interest rates once over this period.
- Given the stage of the US economic cycle, and with inflationary pressures weak in Australia and New Zealand, there’s a growing risk that both the RBA and RBNZ won’t get the opportunity to begin policy normalisation over the next couple of years.
The US Federal Reserve has hiked interest rates seven times since late 2015, and is expected to do so two further times this year, and three again in 2019, according to the FOMC’s latest median forecasts.
Over the same period, and reflecting that both nations sit at a different point in the economic cycle, official interest rates in Australia and New Zealand have been lowered by the RBA and RBNZ.
The overnight cash rate in Australia currently sits at a record-low of 1.5%. New Zealand’s equivalent isn’t much higher at 1.75%, and is also at the lowest level on record.
As seen in this simple-yet-effective chart from the Commonwealth Bank, the policy divergence between these three central banks looks set to continue for some time yet, at least according to financial markets.
It shows the projected outlook for the RBA and RBNZ cash rates compared to the Fed funds rate out to early 2020.
Markets expect the Fed will continue to lift interest rates gradually over this period, even if not as much as FOMC members currently expect.
On the other hand, official policy rates in Australia and New Zealand aren’t expected to rise for at least the next year, perhaps even longer.
A full 25 basis point rate increase from the RBA isn’t priced until November 2019, similar to expectations in New Zealand.
Given persistently weak inflationary pressures in both nations, and the current stage of the US economic cycle, some are even starting to speculate that a possible downturn in the United States in 2020 could see the RBA and RBNZ unable to begin policy normalisation at all, raising the prospect that the next move could be a cut in interest rates.
That’s only speculation at this point, but even the RBNZ admits that it’s “well positioned to manage change in either direction — up or down — as necessary”.
The RBA is a little more confident, suggesting the next move in policy rates is likely to be up.
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