The world\u2019s central banks – and many bond investors – may look \u200bat Australia\u2019s decision on Tuesday with some discomfort. The Reserve Bank of Australia delivered its first \u200dinterest-rate rise in more than two years, a move that could herald a broader shift in global credit policy as the world economy heats up again.<\/p>\n
Japan\u2019s peculiar circumstances apart, the RBA is the first major central bank since 2023 to hike rates \u2014 and just six months after its last cut.<\/p>\n
Although expected by markets, the RBA also leaned hawkish about further hikes. It was coy about \u200dwhether a new \u200btightening cycle was now underway. But officials were clearly disturbed at their inability to get inflation back to target and doubtful that previous settings were doing the trick.<\/p>\n
The debate also circles the thorny concept of where a so-called neutral interest rate may be. It\u2019s a question at the heart of the Federal Reserve\u2019s conundrum, despite political noise and pressure for it to floor rates even further.<\/p>\n
Dismissed by some economists as too vague and elusive a gauge for precise policy calibration, the idea of a neutral policy rate – one which neither restricts credit creation and economic activity nor stimulates them – still guides many central banks seeking to find \u2060the ideal equilibrium.<\/p>\n
After frantic monetary tightening in 2022 to rein in a post-pandemic inflation spike, central banks have collectively dialed back rates over the past 18 months as consumer price pressures subsided again. Markets have bet they are at, or close to neutral – and will stay there.<\/p>\n
The problem is that in most cases, including Australia and the U.S., inflation has not yet returned to target. And there are signs that economies and credit demand are re-accelerating once more.<\/p>\n
Citing capacity pressures amid brisk growth in household spending and private investment, the RBA reckoned that inflation would remain above its 2-3-per-cent target range \u201cfor some time\u201d and pushed interest rates \u200cback up. Investors now bet there\u2019s a 75-per-cent chance of \u200dyet another rise in May.<\/p>\n
The RBA statement said rather baldly that it seems to have lost sight of its lodestar. \u201cFinancial conditions eased over 2025 and it is uncertain whether \u200dthey remain restrictive.\u201d<\/p>\n
Is it now just feeling around in the dark?<\/p>\n
Despite critics of following a barely \u200cmeasurable real neutral rate, often known as \u201cr-star,\u201d the Aussie central bank seems to be saying: you know it when you\u2019re not there.<\/p>\n
Extrapolating that \u2060pressure out to all other major central banks may be unfair. The European Central Bank, for example, has managed to get inflation squarely back to target and seems comfortable that it has found its \u2018happy place\u2019 for now.<\/p>\n
But \u200bthe Fed is a very different matter.<\/p>\n
Despite the U.S. political push for further deep interest rate cuts and the nomination of Kevin Warsh to take the helm as Fed chair from May, the picture in front of the Fed is one of core inflation still a full percentage point above target, and financial conditions at their loosest since 2021.<\/p>\n
With U.S. GDP trackers still registering above 4% annualized growth, corporate earnings growth in double digits and labor markets stable, this week saw signs of what looks like a new-year acceleration.<\/p>\n
The ISM survey of U.S. manufacturers for January showed factory activity surged to its highest \u200bsince 2022 – the first expansion in more than a year. New orders drove the jump, while input prices continued to rise rapidly. JPMorgan has detailed how that upturn was echoed around the world. January surveys, it argues, point to a global industrial upturn running at 2\u20133% at the turn of the year.<\/p>\n
\u201cThe upturn is broadening: the SG Global Cycle Indicator now reads \u2018Boom\u2019,\u201d wrote Societe Generale strategists.<\/p>\n
What\u2019s more, the Fed\u2019s own quarterly Senior Loan Officer Opinion Survey showed business loan demand from large and medium-sized firms in the fourth quarter was the strongest since the second quarter of 2022. It also said banks expect it to strengthen further this year.<\/p>\n
Despite all that, many Fed officials have characterized the current policy rate as mildly restrictive – even if it\u2019s hard to find where it\u2019s bearing down on the overall economy. A subdued housing \u2060market is often cited, but that\u2019s more down to long-term market rates, which have barely responded to Fed policy easing for more than a year.<\/p>\n
Indeed, by some Fed-published estimates of the \u201cr-star,\u201d U.S. policy \u2060rates are already in stimulative territory.<\/p>\n
\u201cA genuinely \u2018hot\u2019 economy could come as a nasty surprise, especially for bond markets, which can\u2019t see past central banks leaving rates at \u2018neutral\u2019 forever,\u201d wrote TS Lombard economist Dario Perkins.<\/p>\n
The RBA and the Fed are different \u200cbeasts, of course, with vast differences in economic scale.<\/p>\n
But this week\u2019s debate and action \u201cDown Under\u201d may prick up some ears in Washington.<\/p>\n
As prospective new Fed Chair, Warsh\u2019s billing as something of a hawk seems at odds with an interview process that likely required his support for big rate cuts in order to secure the nomination.<\/p>\n
Unless the new-year economic heat turns out to be a flash in the pan, Warsh\u2019s toughest task may well be finding a case for any further rate cuts at all.<\/p>\n","protected":false},"excerpt":{"rendered":"The world\u2019s central banks – and many bond investors – may look \u200bat Australia\u2019s decision on Tuesday with…\n","protected":false},"author":2,"featured_media":453253,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[901,888,902,879,877,903,45,49,48,876,895,896,891,878,875,46,549,295,894,887,914,880,881,893,889,890,884,904,885,909,910,912,907,911,905,908,882,898,899,714,897,906,865,61,900,892,886,883,913],"class_list":{"0":"post-453252","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-alberta","9":"tag-arts-news","10":"tag-bc","11":"tag-breaking-news","12":"tag-breaking-news-video","13":"tag-british-columbia","14":"tag-business","15":"tag-ca","16":"tag-canada","17":"tag-canada-news","18":"tag-canada-sports","19":"tag-canada-sports-news","20":"tag-canada-trafficcanada-weather","21":"tag-canadian-breaking-news","22":"tag-canadian-news","23":"tag-economy","24":"tag-education","25":"tag-environment","26":"tag-federal-government","27":"tag-foreign-news","28":"tag-globe-and-mail","29":"tag-globe-and-mail-breaking-news","30":"tag-globe-and-mail-canada-news","31":"tag-government","32":"tag-life-news","33":"tag-lifestyle","34":"tag-local-news","35":"tag-manitoba","36":"tag-national-news","37":"tag-new-brunswick","38":"tag-newfoundland-and-labrador","39":"tag-northwest-territories","40":"tag-nova-scotia","41":"tag-nunavut","42":"tag-ontario","43":"tag-pei","44":"tag-photos","45":"tag-political-news","46":"tag-political-opinion","47":"tag-politics","48":"tag-politics-news","49":"tag-quebec","50":"tag-sports-news","51":"tag-technology","52":"tag-travel","53":"tag-trudeau","54":"tag-us-news","55":"tag-world-news","56":"tag-yukon"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/453252","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=453252"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/453252\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/453253"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=453252"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=453252"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=453252"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}