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Steve Campbell: Rates still on hold but no victory declaration yet
August 01, 2023
If services inflation remain stickier than the RBA expects, further policy tightening can’t be ruled out, argues Pendal’s head of cash strategies, STEVE CAMPBELL
THE Reserve Bank today left the cash rate unchanged at 4.1% at its August meeting.
The market had priced about a 30 per cent chance of a hike at this meeting.
The RBA has adopted a wait-and-see approach after a 4 per cent increase since May last year – and with economic growth forecast below trend for 2024 and 2025 (at 1.75% and 2% respectively).
The bank expects inflation at 3.25% by the end of next year, falling to the 2-3% target band by late 2025.
With economic growth forecast to slow, the RBA expects unemployment to start rising towards 4.5% by late 2024, in turn reducing wage inflation.
Provided productivity growth picks up, the RBA continues to see wages growth as consistent with the inflation target.
Good luck with that.
Inflation – no victory yet
On inflation, the RBA was not claiming victory just yet.
Certainly, it has peaked and is headed in the right direction.
One of the great remaining uncertainties is services inflation, which the RBA points out has been surprisingly persistent overseas.
It is also a cause for concern domestically.
Annual services inflation is at the highest level since 2001.
It hit 6.3% in the recent second-quarter inflation data released in late July, driven by wage inflation, higher utilities and rents.
What it means for investors
It’s likely that Governor Lowe finishes his seven-year stint with no further change at his final meeting in September.
With the RBA on pause for its past two meetings, “job done” headlines for this cycle will gather pace.
The temptation for investors would be to lock in term deposits in such an environment with the cash rate potentially not changing.
There have been false starts abroad worth considering here.
The Bank of Canada is the one that springs to mind.
Find out about
Pendal’s
cash funds
The Bank of Canada paused monetary policy after its January meeting to see what effect the cumulative policy tightening was having.
They ended up tightening policy further in June and July with inflation not falling quickly enough and economic growth forecasts being revised higher.
They have subsequently tightened policy by 25 basis points in June and July.
Should services inflation remain stickier than the RBA expects, further policy tightening can’t be ruled out.
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 August 1, 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.
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