US Federal Reserve chair Jay Powell this week said it is likely to take “longer than expected” for inflation to return to the central bank’s 2 per cent target.
“We’ve said at the [Federal Open Market Committee] that we’ll need greater confidence that inflation is moving sustainably towards 2 per cent before it would be appropriate to ease policy,” Powell said.
“The recent [inflation] data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” the Financial Times quoted Powell as saying.
Kiwibank chief economist Jarrod Kerr said the markets had been volatile “and justifiably so”.
Earlier in the year, falls in New Zealand wholesale rates prompted some banks to tinker with their mortgage rates, shifting them slightly lower.
“We have gone from not pricing in enough [cuts] to pricing in way too much, to pricing in what we have now, which is much more reasonable,” Kerr said.
Up until recently, market pricing had suggested a full 25-basis-point rate cut in the official cash rate – currently at 5.5 per cent – by August, followed by another before the end of the year.
Market pricing had also previously put an outside chance of a cut as early as next month.
Expectations have since been pared back sharply, with a full rate cut now priced in for November.
“The whole yield curve has lifted. Bets of rate cuts have been taken off, led by the Fed,” Kerr said.
Any chance of a change of stance from the US central bank has big ramifications for others, such as the European Central Bank, the Bank of England, the Reserve Bank of Australia, the Reserve Bank of New Zealand, and the Bank of Canada.
“We were getting excited about rate cuts, and we did see a big move to lower wholesale interest, so that got some headlines, but those wholesale rates have bounced right back,” Kerr said.
“Expectations that banks will be able to continue to lower interest rates have unfortunately been sucker-punched by this move higher in wholesale interest rates.”
US Federal Reserve chair Jerome Powell. Photo / AP
Capital Economics said it looked like “interest rate purgatory” was likely to continue for a while.
“With the economy in the doldrums and the labour market slackening, we still expect domestically-driven price pressures to abate over the coming months.
“Even so, we’re pushing back our forecast for the [Reserve] Bank’s first rate cut from August to November,” it said.
The average floating mortgage rate was 4.38 per cent in April 2021 but has risen sharply and was 8.63 per cent last month.
On the other side of the coin, savers are likely to enjoy elevated deposit rates for much of the year – the average interest rate on a six-month term deposit fell as low as 0.83 per cent in April 2021 and last month was 6.04 per cent.
ANZ said in a commentary that bond yields have risen meaningfully across the curve over the past fortnight.
“We think they likely have further to run as markets adjust to the global ‘higher for longer’ vibe, and as local markets digest the more troubling aspects of the CPI data.”
A tumultuous week on the world’s financial markets was capped off by more volatility on the back of Israel’s missile strikes on Iran, which caused a sell-off in US 10-year Treasuries in the Asian trading day, a rally in the US dollar and a half-cent fall in the New Zealand dollar to US58.5c.
Brent crude oil spiked up by about 4 per cent to more than US$90 a barrel.
“The market is taking it badly and we are seeing risk aversion in the case of equities and bonds, but also in oil,” Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said.
“If we put the Iran stuff to one side, the US has been a building narrative.”
Markets now see just two rate cuts from the Fed this year.
“That’s miles less than it had at the beginning of the year,” Pepper said.
“Data out last week showed US prices rose 3.5 per cent over the 12 months to March, up from 3.2 per cent in February.
“Powell had for a while tried to toe the line that these were just bumps along the road,” Pepper said.
“But I think the inflation development may have been a bump too many.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
