BoJ May Offer Hints Of Next Rate-hike Timing In Ueda's Closely Watched Speech

The Wage Price Index increased 0.8% in the September quarter and 3.5% over the year. This was in line with our expectations but – as Westpac Economics Senior Economist Justin Smirk pointed out – slightly below consensus expectations. The extent of the step down in the year-ended growth rate was well anticipated, because it reflected the dropping out of the outsized 2023 National Wage Case and related decisions from the calculation.

The RBA does not publish a full quarterly wages forecast profile, only the forecasts for year-ended growth as at June and December quarters. So, we do not know exactly what they expected for the September quarter. However, it would now need to see a bounce back in quarterly growth to around 1% for the December quarter for its end-2024 forecast to come true. Even allowing for some recent health-care agreements, we consider such a bounce to be beyond the bounds of plausibility given how smooth this series tends to be. There are no strong reasons for a change of direction of this kind, either. Surveys, data on awards and enterprise agreements and feedback from our own customers would all suggest that a sudden bounce back in wages growth is not happening.

We therefore expect that the RBA will have to revise down its near-term wages growth forecasts again in February, having already done so in November.

Forecasting is hard, so some revisions and near-term misses are par for the course. Even so, is there something going on with the way some observers think about domestic labour costs, that could be affecting their interpretation of the economic outlook? And in the case of the RBA, could this be affecting its monetary policy decision-making?

Some insights can be gleaned from the following passage from the latest Statement on Monetary Policy:

At current rates of productivity growth, WPI growth remains somewhat above rates that can be sustained in the long term without putting upward pressure on inflation. All else equal, when productivity growth is positive, WPI growth is able to outpace inflation while still being consistent with inflation at the midpoint of the target range. As trend growth in labour productivity is likely below its rate in previous decades, the sustainable WPI growth rate is probably lower than in the past and below the current rate of growth. That suggests it would be difficult to sustain wages growth at its current pace in the longer term without a higher pace of trend productivity growth.

There are a few things worth noting about this passage.

First, this reasoning comes from the markup model for forecasting inflation. As explained in a previous note, this model starts from the presumption that prices are a (roughly stable) markup over costs, including labour costs. A bit of algebra later leads to a relationship that states that wages growth minus productivity growth is approximately equal to inflation (prices growth). As discussed in that previous note, there are a lot of assumptions underlying the use of this relationship for forecasting. But more fundamentally, the WPI is not the measure of labour cost growth that maps most closely to the one implied in that relationship. Rather, the more volatile average earnings measures from the national accounts are more relevant.

Presumably the RBA has used the smoother WPI measure for ease of exposition. In that case, though, one should be even more circumspect about how tightly the relationship should hold.

Second, there are some interesting implied choices of time period used in that paragraph. For example, it is stated that future trend productivity growth is expected to be slower than the average of previous decades. This is not controversial: the late 1990s was a period of strong productivity growth globally, largely because of the adoption of personal computers and other new technologies. More recent productivity growth was slower, but not zero. The real question is whether future productivity growth will be slower than the average of more recent times, such as the years leading up to the pandemic. Perhaps this is true, but the reasons for a further slowdown have not been elucidated. While any boost from AI and other technology will indeed take time to show up in the productivity figures, just as PCs did, a further decline in global trend productivity growth is not the base case for the profession more broadly.

Third, even granting the reduced noise from using the WPI, and assuming a further slowdown in global productivity, there is the question of why the RBA repeatedly referenced the sustainability of the current rate of growth. At the time of publication, this was the year to the June quarter figure of 4.1%, not the year to September quarter figure of 3.5% just reported. Yet the RBA surely anticipated the step down in growth that was already baked in to awards and many enterprise agreements. Why the focus on the sustainability of a growth rate that everyone knew was not going to be sustained? The question also arises of how we reconcile wages growth having already rolled over, to annualised rates in the low 3s, with the RBA’s view that the labour market is still tight.

Later in the document, the step down in unit labour cost growth from 7% annualised to 3½% annualised in just six months was noted (as we had previously expected and written about). So why the implication that growth in labour costs was much stickier than that?

The deeper question is: with wages growth tracking in the low 3s and productivity growth not being zero, why has the RBA focused so much on the risk that wages growth is unsustainable?

I can’t help thinking that this partly reflects deep-seated narratives about the Australian economy not being competitive. These narratives stemmed from the so-called ‘real wage overhang’ that emerged in the 1970s following the policy-induced wages breakout then. Another bout of this belief system emerged after the mining boom and attendant strong income growth. Since then, restoring competitiveness by crimping wages growth has been a common go-to in the policy discourse in Australia, far more than elsewhere in my observation. It is as if people forget that exchange rates tend to move much faster than domestic labour costs.

In any case, even if productivity growth averages a touch lower than 1% (worse than recent history), then by the RBA’s own figuring, WPI growth averaging 3.2% (the annualised rate of the past three quarters) is well and truly consistent with inflation averaging 2½% or below. Perhaps we need to let go of the pandemic-era hangover.

The central bank kept its rate unchanged in October

The National Bank of Hungary (NBH) kept its base rate unchanged at 6.50% in October. The interest rate corridor also remained unchanged, with a range of +/- 100bp around the base rate. In line with its stability-oriented approach, this decision was driven by the significant weakening of the Hungarian forint due to global risk aversion shocks. Although there were some positive developments in the economy from a monetary policy perspective, the decision did not come as a big surprise due to market stability issues. Something similar can be said about the upcoming decision in November.

The main interest rates (%)

Source: NBH

Inflation outlook and risk perception on the sidelines, again

Headline inflation rose slightly by 0.2ppt to 3.2% year-on-year in October, below expectations. Services prices fell by 0.9% month-on-month, partly due to cheaper “other travel” (airfares) and health services, but the downside surprise was mainly due to an unexpected fall in telecommunication services prices (-6.8% MoM). However, it may be that this only reflects the impact of the free data packages offered during the September floods. If this is the case, then it was a one-off event that may re-accelerate inflation next month. Nevertheless, looking at the data, the picture is satisfactory in the short term, but there is a lot of uncertainty in the medium term, for example due to the expected high wage increase next year. All in all, the short-term inflation situation in itself could even have opened the door to an easing, but taking other factors into account, this is clearly no longer the case.

As far as risk perception is concerned, the National Bank of Hungary sees this through the lens of fiscal developments and external balances. The October budget deficit was the second largest since 2002, but this could also be a one-off event due to the September floods. The government has published the draft budget for 2025, which aims to maintain the previously telegraphed deficit level of 3.7% of GDP, and it looks more or less realistic, although we could point to several risks. On the external balances side, we haven't seen any significant deterioration from recent trends. All in all, risk perceptions alone won't play a major role in the decision-making process this time.

Headline and underlying inflation measures (% YoY)

Source: HCSO, NBH, ING

Financial market instability drives monetary policy decision

Under normal circumstances, the inflation picture and risk perceptions might move the needle a little towards easing, but with the instability in the financial markets, this idea is no longer a possibility. And the door to easing has been slammed shut, judging by the central bank's latest communication.

Since the last NBH rate-setting meeting (22 October), core rates have moved significantly higher, with both the short and long ends of the US yield curve rising by around 25bp by 13 November. The 10-year Bund also moved higher by around 7bp. This time, however, such a move in core rates did not translate into a higher risk premium for Hungarian government bond yields, as the spread between 10-year HUF and PLN government bond yields narrowed by 7bp compared to the October meeting.

The EUR/HUF exchange rate is therefore now the key issue for financial market stability. Since the October meeting, the exchange rate has moved sharply higher on the back of rising geopolitical risks and the outcome of the US presidential election, with Trump and the Republicans winning big. The already fragile currency and these changes pushed EUR/HUF to as high as 412 (3% weaker than mid-October), and the forint remained the underperformer from a regional perspective. A clear red flag in this currency move is that the market has already priced out the possibility of rate cuts in the coming months. This also means that an on-hold decision will be in line with market expectations, which is crucial given the HUF's vulnerability.

Performance of CEE FX versus EUR (end-2023 = 100%)

Source: NBH, ING

Our call

In our view, the National Bank of Hungary will leave the interest rate complex unchanged at its next rate setting meeting on 19 November. This will leave the key interest rate at 6.50%, which is a high conviction call. We also expect the Monetary Council to leave both ends of the interest rate corridor unchanged.

As the market has the same expectation, the focus will be on the communication and the forward guidance itself. While some may expect an open communication on rate hikes, citing an emergency case, such an admission itself could turn out to be a self-fulfilling prophecy and would be premature. We also don't see the central bank pulling the trigger on any kind of liquidity tightening right now, as all possible options have some limitations and could open a Pandora's box for the markets to test the central bank's pain thresholds. We therefore expect the central bank to balance the messages, to be hawkish but not to go the extra mile.

Looking further ahead, we do not expect another rate cut under the current administration (end of February 2025), and while this is not a high conviction call, the new administration will probably not be able to start cutting rates immediately either. We see the dollar continuing its gradual strengthening, the current account could weaken and there could also be some slippage in the budget. All things considered, we expect the cycle of rate cuts to continue, but not until next summer.

Our market views

In pre-election market positioning, the HUF was one of the most short currencies in the EM space, however, the market reaction disappointed, allowing some short position closing and relief for the HUF. However, the market quickly reverted back to the original view of a Trump negative scenario for CEE. Indeed, we should see weaker performance in the CEE region, global trade headwinds and more room for rate cuts in general. The HUF has fallen from an already weak position into a global view which makes a problem for a potential recovery of the currency. Positioning is probably a bit softer than before the election but still clearly short HUF.At the same time, the market has stopped pricing rate hikes into very front-end FRAs. This tells us that while the market is not aggressively negative on HUF assets, it is also too early for any major relief and the market has room to add shorts if it sees reason, which could be both local and global.

Next week's NBH meeting may put the HUF under pressure again. We thus expect EUR/HUF to remain around 410 with constant pressure from the dollar. And in the medium term, we expect EUR/HUF to move higher to 420 next year. The market has outpriced almost all rate hike expectations from very front-end FRAs and FX implied yields, while two rate cuts have returned to pricing in the longer term after the HUF market saw some relief after the US election. Valuations still look cheap in both IRS and HGBs from this perspective. However, as with FX, it is hard to see a major rally here at the moment. Although local data of low inflation and weaker growth would indicate more rate cuts, it seems clear the NBH does not want to go in that direction for some time and the risk of a rate hike has not been completely taken off the table by the market given the fragile FX. Still, in these conditions the belly and long-end should have some chance to normalise slightly and revert some of the steepening we've seen in previous months. Overall, we prefer to wait a bit longer on the sidelines here before we see any major signs of relief.

The NZD/USD halts its three-day losing streak, trading around 0.5850 during the Asian session on Friday. The New Zealand Dollar (NZD) might have received downward pressure as the Business NZ Performance of Manufacturing Index (PMI) fell to 45.8 in October, down from a revised 47.0 in September, reaching its lowest level since July 2024.

The NZD/USD pair holds gains after mixed key data was released from its close trading partner China. Retail Sales rose 4.8% year-over-year in October, surpassing the expected 3.8% and the 3.2% increase seen in September. Meanwhile, the country’s Industrial Production grew by 5.3% YoY, slightly below the forecasted 5.6% but higher than the 5.4% growth recorded in the previous period.

During its press conference on Friday, the National Bureau of Statistics (NBS) shared its economic outlook, noting an improvement in China's consumer expectations in October. The bureau plans to intensify policy adjustments and boost domestic demand, highlighting that recent policies have had a positive impact on the economy.

The US Dollar (USD) remains stable near its fresh 2024 highs, despite indications of slowing in "Trump trades." The US Dollar Index (DXY), which measures the dollar's performance against six major currencies, hovers around 107.00, near its highest level since November 2023.

Market attention is now shifting to the release of US October Retail Sales data on Friday, along with remarks from Federal Reserve officials. On Thursday, Fed Chair Jerome Powell commented that the recent performance of the US economy has been "remarkably good," providing the Fed with the flexibility to gradually lower interest rates.

New Zealand Dollar FAQs

What key factors drive the New Zealand Dollar?

The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.

The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.

How does economic data influence the value of the New Zealand Dollar?

Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.

How does broader risk sentiment impact the New Zealand Dollar?

The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.

Source: FXSTREET

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