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Steve Campbell: Inflation remains top priority for hawkish RBA
The RBA today tightened monetary policy by another 25 basis points, with the promise of more to come. Pendal’s STEVE CAMPBELL explains what it means for investors
THOSE looking for the Reserve Bank to provide some respite from higher rates will be left disappointed after today’s decision and hawkish accompanying statement.
The RBA tightened monetary policy by a further 25 basis points to 3.35%, with the promise of more to come.
Ahead of updated economic forecasts later this week, the RBA today revealed some of its projections including:
- Headline inflation falling to 4.75% in 2023 and 3% by mid-2025
- Economic growth dropping to 1.5% over 2023 and 2024. The post-Covid spending spree that benefitted growth in 2022 has run its course, buffers have been drawn down and economic growth will suffer
- Unemployment forecast to increase to 3.75% by the end of 2023 and 4.5% by mid-2025. The labour market remains tight, though there are signs these pressures are easing slightly
The statement concluded with: “The Board expects that further increases in interest rates will be needed over the months ahead…
“…In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
The December-quarter inflation data released in late January exceeded the RBA’s expectations and clearly has it concerned.
The market now has a follow-up hike of 25 basis points priced in at around 70% probability and a full hike priced in for April.
The terminal cash rate is now priced at almost 4% later this year.
Inflation remains the priority
The market had been looking for a softer statement, perhaps following the lead of other central banks recently.
Two weeks ago The Bank of Canada explicitly stated it would pause on policy action as it assessed “the impact of the cumulative interest rate increases”.
The European Central Bank and Bank of England both tightened policy by 50 basis points, but delivered statements that saw yields rally further out the curve.
In the US, the Federal Reserve delivered a 25 basis point hike. The market priced the terminal peak as almost reached — until the “wow” non-farm payroll number and better-than-expected ISM services data released last Friday.
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The RBA is more than aware of the risks posed by the fixed rate mortgage cliff from the middle of the year.
But inflation remains its priority in the near term. Until it heads south they will be on tenterhooks.
The lack of a monthly inflation data series with a long history does the RBA no favours.
The next quarterly inflation release is not due til late April.
The next key releases in February are the labour and wage price index data due on the 16th and 22nd.
Consumption data from retail sales — along with consumer confidence — will also be closely watched.
What it means for investors
With higher yields and steeper curves in the short end of the curve, investors will benefit from their cash portfolios returning closer to 4% in the coming months.
I keep getting questions about investing in term deposits.
Why do this in a rising interest rate environment — in a period where volatility is elevated?
Cash funds offer comparable returns but provide liquidity. It can be quicker to sell a house and get your money rather than waiting for a term deposit to mature.
About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at February 7, 2023. PFSL is the responsible entity and issuer of units in the Pendal Short Term Income Securities Fund (Fund) ARSN: 088 863 469. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com
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