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Anna Hong: What’s keeping Dr Lowe up at night

What are the implications for investors from this week’s RBA statement? Where might Dr Lowe go next? Pendal’s ANNA HONG explains

ON A global scale, the picture looks pretty clear — inflation is here.

Here is a comparison of year-on-year headline inflation growth:

  • United States 7%
  • United Kingdom 5.4%
  • Eurozone 4.7%
  • Canada 4.8%
  • New Zealand 5.9%
  • Australia 3.5%

Australian inflation appears modest in comparison to other regions.

But after the RBA has repeatedly reiterated a target inflation band of 2% to 3%, the market is understandably confused.

As you can see below, actual data for Q4 2021 exceeded that target — and the RBA is forecasting inflation in the higher part of the target range through to 2024.

Yet the Reserve is saying “no rate hike in the near-term”.

Never before has the RBA been so wrong, so quickly.

This week the central bank was forced to revise its February forecasts to match the market since the data showed that the market was correct.

That led to a stand-off on Tuesday after the RBA statement. The front end of the yield curve rallied but without commitment. Yes, lower for just a bit longer…wait, but how much longer?

The RBA provided a few breadcrumbs for the market to follow.

Dr Lowe’s National Press Club speech made it clear the Reserve was not working off “a specific definition as to what ‘sustainably in the target range’ means”.

It will depend instead on the rate, trajectory, outlook, and drivers of the inflation. In a nutshell – it will be all be about wages.

Why do wages keep Dr Lowe up at night?

In the past 10 years wages growth alongside goods prices have been the main reasons inflation stayed below target.

The RBA appears to be pre-empting the dampening effects of the border re-opening.

It remains worried about the impact on wages if the number of temporary visa holders returns to the pre-pandemic levels. See graphs below.

What are the implications?

The RBA’s preparedness to miss the Q1 and probably Q2 global rate hike party, means conditions for mortgage holders, share markets and owners of short bonds remain supportive.

The picture for long bonds is less clear.

We expect real rates to rise in the months ahead, which is very likely to move nominal yields higher as well.


About Anna Hong and Pendal’s Income and Fixed Interest team

Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.

With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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