New ideas are coming from central bankswhich maintain a overall accommodating policythanks to the gradual return of inflation, artfully some exceptionsas in the case of Australia, where fighting the strong price growth has been more difficult. Reserve Bank of Australiatherefore, is forced to move against the trend and maintain a restrictive policy for a long time to come, while the Fed is expected to dissolve all reservations and proceed with its first rate cut in September.
China confirms ultra-expansionary policy
There People’s Bank of China (PBOC), which met today, has interest rates confirmed after the surprise cut in July: the prime rate on one-year loans was kept at 3.35%, The prime rate on five-year loans, used as a benchmark for mortgages, was confirmed at 3.85%. Both had already been cut by 10 basis points in July.
The PBOC’s surprise rate cut in July was decided in a difficult contextin which the risks to growth have become more urgent than the fight against inflation. While price growth increased slightly in July, other metrics – notably credit activity and industrial production – pointed to persistent economic weakness in the country. The July rate cut was the first such move by the PBOC in nearly a year. But the central bank has consistently maintained an accommodative policy promote economic recovery in China.
Korea ready to cut in October
The council will also meet this week Central Bank of Korea which, according to prevailing expectations, should confirm the desire for a relaxation monetary starting from the month of Octoberfollowing the Fed which will proceed with its first rate cut in September.
On Thursday, the BanK of Korea (BOK) will maintain its benchmark interest rate at 3.50%confirming expectations of a cut in the next quarter. The benchmark rate has been at this level since January 2023.
There Korean Won Weaknessone of the worst-performing emerging market currencies in 2024, likely prevented the BOK from anticipating the rate cut. Such a move could have exacerbated the house price increases in Seoul, raising concerns in a country with one of the world’s highest debt-to-GDP ratios (104.3%).
Australia stuck on restrictive policy
From next autumn, Australia will be left alone to maintain a restrictive policy, having confirmed the need to keep rates on hold for longer to fight inflation. This is what emerged from the minutes of the monetary policy meeting of August 5-6, in which the central bank confirmed interest rates unchanged at 4.35% in response to inflation that remains too high at 3.9% and to the strong growth in house prices.
The Australian central bank believes Short-term rate cut unlikely and confirms that monetary policy may have to remain restrictive for a “extended period”to ensure that inflation returns to the 2-3% target by 2026.
“Members noted that keeping the target rate stable at its current level for longer than currently implied by market prices,” the minutes read, “could be sufficient to bring inflation back to target within a reasonable timeframe, but the Board will need to reassess this likelihood at future meetings.” There is currently an 85% chance that the central bank will cut before the end of the year and a near certainty that it will do so by February 2025.
