Steve Campbell: Shouldn’t the RBA be following suit?

Anyone looking at policy easing in the near term will be left disappointed, says head of cash strategies STEVE CAMPBELL

• Why bonds, why now? Hear more from our experts
• Find out about Pendal’s cash funds

THERE was no change from the Reserve Bank of Australia at its November meeting, with the cash rate left unchanged at 4.35%.

No surprises there – if only picking the winner of the Melbourne Cup was as easy.

Anyone looking at an easing of policy in the near term will be left disappointed.

Headline inflation fell sharply in the third quarter due to the effects of energy rebates and some state subsidies. The trimmed mean – one of the RBA’s preferred measures – stripped out these effects and showed annual inflation at 3.5%, in line with the RBA’s forecast.

We also got an updated set of economic forecasts via its Statement on Monetary policy (SoMP). These forecasts show the RBA not seeing “inflation returning sustainably to the midpoint of the target until 2026”.

Inflation is moving in the right direction but remains too high for the RBA to comfortably entertain the idea of policy easing anytime soon.

As has been the case for a while, the level of uncertainty remains high.

Looking at household consumption, its contribution to economic growth has been poor recently due to falling real incomes.

The RBA does expect this to turn, however, with household disposable incomes forecast to rise by 3.9% by the middle of next year.

The labour market also remains tight. The participation rate is at record-high levels and employment growth over the past quarter has been strong.

The RBA forecasts unemployment at 4.3% by the end of this year, before rising to 4.5% by the end of 2025. That does not sound like easing anytime soon.

What about other central banks that have started easing policy – shouldn’t we be following suit?

The following graph shows policy rates over the past 20 years.

Australia and Norway are the last to the rate cut party. Japan doesn’t want to join the party at all after hiking in July, with the prospect of further tightening possible.

The RBA noted that other central banks have eased because they’ve become more confident that inflation is moving back towards their targets.

Expecting the RBA to follow suit in the near term is likely to lead to disappointment. The next move from the RBA will be a cut, but we don’t need to immediately follow the actions of others.

The period pre-GFC shows the US Federal Reserve and Bank of Canada easing against the RBA hiking – different circumstances, with the mining boom sucking up a lot of labour resource and driving wages higher.

Similarly, the period from mid-2016 had other central banks tightening and the RBA remaining on hold in an environment of tepid domestic inflation. The RBA didn’t tighten as early nor as aggressively as other central banks.

Policy is tight, but as the labour is showing it is not so tight that it is strangling the economy. And with disposable incomes likely picking up, the market timing of a first rate cut in May does not seem unreasonable

Find out about

Pendal’s
cash funds

Read more

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.

Find out more about Pendal’s fixed interest strategies here