Daily Commentary BY THE CURVE TEAM –

Multi-Speed Monetary Policy

22nd of May, 2017

It is a very interesting time as far as monetary policy settings are concerned. The post GFC era saw monetary policy across most jurisdictions move in the same direction. In more recent times, economic performance has been diverging, resulting in monetary policy settings following suit after once being in sync. The challenge is that when one central bank move, it can have implications for another.

Last week the RBA confirmed that it is firmly in ‘wait and see’ mode as it assesses the ongoing evolution of both upside and downside risks facing the Australian economy. From a domestic point of view, we can see an extended period where the cash rate is left unchanged. How offshore influences evolve could change that outlook.

In Europe we are finally starting to see the data improve, which has many questioning the outlook for monetary policy. The party line from the ECB is that nothing has changed yet, but cracks are beginning to appear. Bundesbank president Jens Weidmann over the weekend said that “at present it is indisputable that an expansive monetary policy is appropriate”, before saying that debate is growing over the “necessary degree of monetary expansion and the instruments we use.”

In the US, minutes from the FOMC’s May board meeting due out this week are expected to confirm that the dip in the US data is still viewed as ‘transitory’ and more hikes are still coming. That didn’t stop one of the more dovish Fed Presidents, James Bullard from St Louis, saying that inflation is still weak and “too low for the Fed to reach its inflation target.”

If the FOMC does confirm that rate hikes are still coming and we see further signs that monetary policy is turning in Europe, we could see it start to impact the outlook for Australia’s monetary policy setting. How it impacts the outlook will depend on how currency markets and long term interest rates amongst other things react in the evolving monetary policy outlooks offshore.

David Flanagan

Director - Interest Rate Markets