Business activity bolsters case for higher interest rates

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A surprise acceleration in the services sector around the world underscores risk that rates will stay high for longer.

Upbeat global business activity, particularly in the services sectors, climbed to its highest in a year, challenging the view that a recession is imminent and bolstering the case for central banks to continue to raise interest rates to tame inflation.

Next week will be key for interest rates with the RBA, the US Federal Reserve, and the European Central Bank all holding their policy meetings after a robust set of manufacturing reports from the Northern Hemisphere.P Global Flash US Composite Purchasing Manufacturers Index climbed to an 11-month peak of 53.5 in April, following a final reading of 52.3 in March. A reading above 50 indicates expansion. And the survey’s flash services sector PMI rose to 53.7, the highest in a year, from 52.6.

“There is nothing in these results that suggests that the Australian economy is headed for recession,” said Warren Hogan, an economic adviser to Judo Bank. “To the contrary, they point to a lift in Australia’s economic momentum through the middle of 2023.” Even though monetary policy has been tightened aggressively, there are few signs of recession outside the manufacturing sector, noted National Australia Bank head of market economics Tapas Strickland.Fed officials have indicated the central bank will still likely increase interest rates by a quarter point to a range of 5 per cent to 5.25 per cent at its May 2-3 policy meeting, with Fed futures implying a 90 per cent chance of such a move.

 

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