Focus on the RBA & the SNB

Last week witnessed a series of pivotal monetary policy decisions across the globe. While the U.S. Federal Reserve (Fed) opted for its first rate cut in four years, citing easing inflation and a slowing labour market, the Bank of England (BoE) maintained its current rate, expressing concerns about persistent price increases in the services sector and rising wages.

The Taiwanese central bank also chose to hold rates steady, prioritising inflation control despite robust economic growth fueled by its thriving technology sector. Norway’s central bank has decided to keep its key interest rate at 4.50%, the highest level in 16 years. It also indicated that any potential rate cuts won’t happen until at least the beginning of next year.

While the Turkish central bank maintained its key interest rate at 50% for the sixth consecutive month, its latest statement hinted at potential future rate cuts. This marks a shift in tone, as the bank had previously been aggressively raising rates to combat inflation, with the last hike of 50 basis points occurring in March.

In contrast to the cautious stance of the previous central banks, the South African Reserve Bank (SARB) took a more decisive step towards easing monetary policy. Encouraged by recent data showing a decline in headline inflation to 4.4%, the SARB lowered its key interest rate by 25 basis points from 8.25% (a 15-year high) to 8%.

RBA Expected to Hold Interest Rates to 4.35%

The Reserve Bank of Australia (RBA) faces mounting public pressure to cut interest rates, especially following the U.S. Federal Reserve’s recent aggressive move. However, the RBA is expected to maintain its current rate of 4.35%.

While inflation data for August is expected to be released on Wednesday, it will come too late to influence the RBA’s upcoming meeting. However, it will be a key factor in shaping expectations for future decisions. Westpac forecasts a potential drop in annual inflation to 2.7% in August, following a downward trend from 4% in May to 3.5% in July. Additionally, the core CPI, excluding volatile items and holiday travel, showed a decrease from 4.0% in June to 3.7% in July.

If inflation were to go back to 2.7% then it should be brought to within the RBA’s 2-3% target range. However, this positive outlook is tempered by the fact that monthly CPI figures are less reliable than quarterly data, and that the recent moderation in inflation might be partly due to temporary factors like the budget’s energy cost rebate. If inflation does fall within the target range, it could increase public pressure on the RBA to cut rates.

Adding to the complexity, recent employment figures revealed a stronger-than-expected job market, with unemployment remaining steady and a significant increase in hours worked. This resilience in the labour market could provide the RBA with justification to hold off on rate cuts in the near term, despite public pressure and potential easing of inflation.

Australia’s unemployment rate held steady at 4.2% in August, while the economy added a surprising 47,500 jobs, surpassing economists’ expectations of 26,000. The total number of hours worked also rose by 0.4% to 1.962 billion, indicating a strong labour market.

However, despite these positive indicators, the number of people working reduced hours due to economic reasons (not enough work, or less work available than before) remains below pre-pandemic levels, suggesting the labour market is still relatively tight.

The RBA is caught between competing forces: public expectations for lower rates, a potentially easing inflation picture, and a surprisingly robust labour market even though it might start tightening and that the economy is slowing down.

Australia’s sharemarket continued its winning streak, setting a new record high for the fourth consecutive day on Thursday. The market reached a peak of 8,256.62 points last week, coinciding with a 1.55% appreciation of the Australian dollar against the U.S. dollar over the same period.

Swiss Franc’s Strength Poses Challenge, SNB Rate Cut Anticipated

The recent appreciation of the Swiss franc, nearing its highest level since 2015, is causing concern for the Swiss National Bank (SNB). The Swiss franc (CHF) rose to its highest level against the euro in nearly a decade in August, close to the 0.9208 level. It has also strengthened against the U.S. Dollar from May 2024.

This strength in the Swiss franc is a double-edged sword for the Swiss economy. On the one hand, it makes imports cheaper, which can support inflation. However, it also makes Swiss exports more expensive for foreign buyers, potentially hurting the country’s export-oriented industries. This is particularly concerning at a time when inflation is already below the SNB’s target, but shouldn’t rise too much, and global economic uncertainties are dampening demand.

The franc’s surge in August, triggered by a flight to safety amid concerns about U.S. and global growth and rising tensions in the Middle East, has exacerbated these challenges. Swiss manufacturers, who rely heavily on exports, are feeling the pinch as their goods become less competitive in international markets. This pressure on the export sector could have ripple effects throughout the Swiss economy, further complicating the SNB’s efforts to manage inflation and support growth.

SNB Chairman Thomas Jordan acknowledged the difficulties faced by Swiss industries due to the strong franc and weaker demand from Europe. While emphasising interest rates as the primary tool, Jordan also indicated that currency market interventions remain an option to address the situation.

Market participants are now anticipating another interest rate cut by the SNB. With inflation dropping to 1.1% in August, well below the SNB’s target, and the franc’s persistent strength, a rate cut seems inevitable. However, the extent of the cut remains uncertain, with predictions ranging from 25 to 50 basis points. The SNB has already lowered rates twice this year, and a further reduction would underline its commitment to supporting the economy and managing the challenges posed by the strong franc.

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