Inflation Shows Signs Of Easing In Australia, Europe — Is This The Example The Fed Needs For Interest Rate Playbook?

Author: Natan Ponieman | March 07, 2023 05:27pm

As all eyes in the U.S. turned to Fed Chair Jerome Powell's words on inflation Tuesday, halfway across the world, the Reserve Bank of Australia issued its tenth consecutive interest rate hike.

Interest rates in the land down under reached 3.6% and are at the highest point in 11 years.

Yet the hike came with words of hope from Reserve Bank Governor Philip Lowe. While Lowe indicated that further rate hikes are ahead, he said the bank's measures are working and inflation has already crossed its peak.

Meanwhile in the Eurozone, the European Central Bank is reiterating its hawkish approach to inflation while consumers show optimism that prices will drop in the coming years.

Is The Australian Economy The Proof The Fed Needs?

"Goods price inflation is expected to moderate over the months ahead due to both global developments and softer demand in Australia," Lowe said in a statement.

The RBA's central forecast is for inflation to decline this year and next, "to be around 3% in mid-2025."

Conditions in the Oceanian country have some parallels with the U.S. economy. Australian unemployment is at a 50-year low, while U.S. unemployment hasn't been this low in 53 years.

The housing market has slowed down, as in the U.S., while the service industry remains strong.

The iShares MSCI Australia ETF (NYSE:EWA), which provides exposure to large and mid-sized companies in Australia, fell 2.9% Tuesday.

Key Australian stocks listed on U.S. exchanges also saw a pullback.

Mining and energy giant BHP Group Ltd (NYSE:BHP) fell by 2.8%.

Building materials manufacturer James Hardie Industries plc (NYSE:JHX) was down by 2.7%.

The local Australian market, however, followed by the S&P/ASX 200 index — known as the Australian S&P 500 — rose by 0.5%.

Europe: Governors Plan More Hikes While Consumers See Prices Declining

In the European Union, consumer inflation expectations are dropping. Median inflation expectations for the three years ahead dropped to 2.5% in January, from 3% in December. 

In Germany, Europe's largest market, consumers are expecting inflation to reach the ideal goal of 2% in the next three years.

For the 12 months ahead, expectations have also dropped, but at a milder rate, coming down from 5% in December to 4.9% in January.

Next week, the European Central Bank is expected to issue a new interest rate hike. In a Sunday interview, ECB President Christine Lagarde said it was "very, very likely" that interest rates across the Eurozone would be raised by 0.5% to reach 3.5%.

Lagarde said that "headline inflation has gone down in recent months, and will continue to decline in the next few months," but core inflation remains too high.

Austrian central bank chief Robert Holzmann told German newspaper Handelsblatt on Tuesday that he's pushing for a 0.5% hike in March, and shared his hawkish opinion that further 0.5% increases should be executed in May, June and July.

Unsplash image from NASA.

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