On Wednesday local time, the Bank of Canada announced its interest rate resolution, while maintaining interest rates unchanged, implying that it will consider further interest rate hikes. The quarterly inflation indicators for Australia announced on the same day were higher than market expectations, leading to a significant increase in interest rate expectations. There is a widespread consensus that the European Central Bank and the Federal Reserve will remain calm for the two major economies that are about to face interest rate talks, but there are still many variables in the policy outlook.
The Bank of Canada's decision is biased towards hawks
The Bank of Canada announced on Wednesday that it will maintain its key overnight interest rate at 5.0%, while opening the door for further rate hikes as inflation may remain above the target for the next two years.
The resolution statement states that there is increasing evidence that a series of interest rate hikes are suppressing economic activity and easing price pressures. Weak demand and rising borrowing costs are putting pressure on commercial investment. The surge in Canada's population has alleviated labor market pressures in some industries, while increasing housing demand and consumption. In the labor market, recent employment growth has been slower than labor growth, and job vacancies continue to decrease. However, the labor market remains tense, and wage pressure still exists.
The Central Bank of China predicts that economic growth will continue to weaken next year, which reflects both the expanded impact of past interest rate hikes and the slowdown in foreign demand. The rebound in growth rate since 2025 is driven by household spending and increased exports and commercial investment in response to improved foreign demand. During the forecast period, the Canadian economy will grow by 1.2% this year, 0.9% in 2024, and 2.5% in 2025.
However, the inflation situation remains severe, and in recent months, the CPI has been unstable -3.3% in July, 4.0% in August, and 3.8% in September. Inflation is spreading to the service industry, and in addition to rising mortgage interest costs, inflation in rent and other housing costs remains high. Short term inflation expectations and corporate pricing behavior are only gradually normalizing, with wage growth rates maintained at around 4% to 5%, and the central bank's preferred core inflation indicator shows little sign of decline.
According to the latest forecast from the Bank of Canada, the average CPI in Canada will be around 3.5% by mid next year and will gradually decrease to 2% by 2025. Due to the persistence of energy prices and core inflation, the recent time path has been pushed back. The Policy Committee is concerned about the slow progress of price stability and the increased risk of inflation, and is prepared to further increase policy interest rates if necessary, while continuing to pay attention to the balance of economic supply and demand, inflation expectations, wage growth, and corporate pricing behavior.
Andrew Kelvin, Chief Strategist at Dominic Securities Canada, believes that the latest policy decision meets expectations, especially considering weak growth in recent months. It should be noted that the central bank once again emphasized that the progress of price stability is slower than they hoped. Therefore, they threatened to further raise interest rates.
Australian inflation report ignites interest rate hikes and pricing
Since July, the Australian Federal Reserve has maintained its official cash rate at 4.1%. Former Chairman of the Federal Reserve of Australia, Philip Lowe, warned before leaving office in September that inflation risks still exist.
His concerns have also become a reality. According to data released by the Australian Bureau of Statistics on Wednesday, the consumer price index (CPI) rose 1.2% in the third quarter, higher than the market forecast of 1.1% and much higher than the 0.8% increase in the second quarter. The CPI increased by 5.6% year-on-year in September, significantly accelerating from 5.2% in August.
This undoubtedly increases the risk of further interest rate hikes. Futures pricing shows that the possibility of raising interest rates in early November has increased from 35% before the data release to 60%, and the interest rate endpoint has further increased to 4.43% in the first quarter of next year. The three-year Australian treasury bond bond futures fell 15 basis points, the lowest level since 2011.
Investors' concerns are related to the latest statement by the newly appointed Federal Reserve Chairman of Australia, Michelle Bullock, who stated in her first public speech after taking office the day before that if inflation data shows a significant increase in price pressure on the entire economy, it is likely to lay the foundation for interest rate hikes. The speed of inflation returning to the target may be slower than currently predicted. If there is a substantial increase in the inflation outlook, the board of directors will not hesitate to further increase the cash interest rate
After the release of inflation data, UBS expects that the Australian Federal Reserve may raise its cash interest rate by 25 basis points to 4.35% in November. The National Bank of Australia has also reiterated its judgment on raising interest rates. EToro market analyst Josh Gilbert said, "I believe that the CPI reading has undoubtedly pushed the Australian Federal Reserve in the direction of raising interest rates, rather than standing still like in the past few months
European and American materials remain patient for the time being
The European Central Bank will announce its interest rate resolution tonight in Beijing time. Due to the recent cooling of inflation and stagnant economic activity, institutions generally expect the European Central Bank to suspend interest rate hikes.
A reporter from First Financial News noticed that the data released this week showed that due to a sharp decline in output combined with weak demand, the contraction rate of economic activity in the eurozone was faster than expected, and the comprehensive purchasing managers' index fell to a nearly three-year low in October. At the same time, consumer sentiment has further deteriorated, causing the European economy to slide towards the brink of recession.
However, the recent impact of the Middle East situation on energy prices has posed new challenges to policy choices. European Central Bank President Christine Lagarde stated on Wednesday that the struggle to curb consumer price inflation is not yet over and is monitoring the trend of oil prices to prevent the impact of the Israeli-Palestinian conflict on inflation. Energy prices are the main driver of inflation in 2022, and we know how much cost expensive energy prices bring and how much pain people have suffered
Carsten Brzeski, global macro head of ING, a Dutch international group, believes that with the recent surge in oil prices and the upward trajectory of inflation in the eurozone in 2024, it cannot be completely ruled out that the European Central Bank will still choose to raise interest rates again in December, which will not help its own reputation. But this is a discussion in December, and facing all the new uncertainties, the timing of the European Central Bank's suspension cannot be better now
The Federal Reserve will hold an interest rate meeting next week. The federal funds interest rate futures show a probability of remaining unchanged of over 95%.
Recently released multiple data shows that the US economy remains resilient with support from consumption and the labor market, and Federal Reserve Chairman Powell also hinted that further tightening of policies may be necessary. However, several Federal Reserve officials have mentioned in recent speeches that the upward trend in US bond yields has tightened financial conditions, reducing the need for further interest rate hikes. The interest rate futures market still tends to lean towards the end of the tightening cycle.
Bob Schwartz, a senior economist at the Oxford Institute of Economics, previously stated in an interview with First Financial reporters that with the Federal Reserve raising interest rates by 525 basis points this round, policy will tend to be cautious in the future, which means that the threshold for rate hikes will be higher than before. Nevertheless, Schwartz believes that this does not mean that interest rate cuts are imminent. He postponed the window for the first rate cut to the third quarter, and the easing cycle will be slower than before until the Federal Reserve can confirm that the inflation target will be achieved.