Central banks around the world remain fully committed to returning inflation to target. So far in 2024 this has required patience with restrictive interest rate settings. Inflation is coming down, but progress has been slow and uneven across segments of spending.
Central banks that have started to ease are proceeding carefully, as policy still needs to remain restrictive to return inflation to target. They are not rushing into rapid easing cycles. For those that have the confidence to cut, numerous criteria have been considered, including momentum and composition of current inflation, the expected evolution of future inflation and the effectiveness of policy settings in restraining demand.
Household and business expectations also play a crucial role in the formation of inflation and wage growth. For most economies ANZ Research monitors, progress has been made on all fronts, but inflation has not yet returned sustainably to target.
That doesn’t mean policy is not adequately restrictive. It is just taking a little longer for services inflation to settle on a sustainable path to target. Many service providers have seen improved pricing power since the pandemic; this was evident in the first quarter. This appears to be waning with heightened consumer sensitivity to prices, but there are some idiosyncratic factors that contributed to price stickiness.
As a result, ANZ Research has made modest upward revisions to its average inflation forecasts in many economies and scaled back the extent of anticipated monetary easing for 2024. The earliest the US is now expected to start cutting rates is in September, out from July previously.
In Australia, ANZ Research has pushed out the expected timing of the first cut in interest rates until February and in New Zealand, February 2025. In Asia ex-China, only two central banks, the Reserve Bank of India and the Bank of Korea, are forecast to cut rates in 2024, and that will amount to single cuts of 25 basis points.
Nevertheless, ANZ Research is growing more confident the disinflation process has resumed in the US. Demand is weakening. Retail spending has slowed markedly, demand for labour is weakening and wage growth is moderating. Excluding items like motor-vehicle insurance from the core CPI illustrates a broad and sustainable disinflation is underway.
If the recent improvement in inflation data continues, we expect the Fed will be able to make two 25 basis-point rate cuts this year, one in September and one in December.
The disinflation process is more advanced in the euro area where demand growth has been persistently below potential since the outbreak of the conflict in Ukraine. That allowed the European Central Bank to acknowledge the very substantial improvement in inflation by cutting interest rates in June.
ANZ Research is confident continued restrictive ECB settings will bring about a further reduction in inflation, and expects the ECB to cut rates twice more in the second half, for a cumulative 50 basis points.
Rebalancing
Economies in general have so far avoided contractions in growth despite rapid monetary tightening. The technical recessions in New Zealand and the United Kingdom in the second half of 2023 were very shallow.
Globally, labour markets remain strong, even if rebalancing, and in many regions record employment is a stand-out characteristic of this cycle. ANZ Research expects the lagged effects of policy restrictiveness will see labour markets rebalance further. Higher fiscal spending, strong household balance sheets and robust banking sectors should also help mitigate the downside risks to growth.
In the US, the high level of mortgages on 30-year fixed rates has meant the debt servicing cost for households is now only back to 2019 levels despite the highest-level fed funds in 23 years. That’s good news for economies whose export sectors are dependent on US consumer activity.
Export-led growth in Asia (ex-China, India) is due to gains made in the US as well as Asia’s position in the semi-conductor value chain. Within the region, private consumption is moderating, and capital spending is likely to pick up only selectively.
An unforeseen slowdown in the US remains the greatest risk to Asia’s growth. India is the standout performer and those drivers of growth are likely to remain intact. Infrastructure spending, digitalisation and ambitious growth plans for the manufacturing and service sectors remain in place after recent elections.
China’s economy is continuing to battle headwinds, including property and over-capacity in the manufacturing sector. Resolving these issues will take time but, owing to a high level of policy activism, ANZ Research expects the economy to grow by 4.9 per cent in 2024 and 4.5 per cent in 2025.
In New Zealand, as the lagged effects of monetary tightening bite, ANZ Research will watch how stuttering economic growth will affect the inflation path.
In Australia, growth is forecast to pick up in the second half of 2024 and into 2025. Ongoing government consumption as well as business investment will support demand. ANZ Research expects the Reserve Bank of Australia to remain very focused on mitigating upside inflation risks, and anticipates only a modest 75-basis-point rate-cutting cycle in 2025.
Brian Martin is Head of G3 Economics at ANZ
This is an edited version of the ANZ Research report “ANZ Research Quarterly: striving towards a new normal(isation)”, published June 25, 2024.
