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Income and Fixed Interest
Steve Campbell: RBA ‘well-positioned’ to ease rates more aggressively
Monetary policy settings remain restrictive in Australia even after two rates cuts this year, says Pendal’s head of cash strategies Steve Campbell.
Last week the Reserve Bank cut 25 basis points to 3.85%.
A pause in US tariffs and a plethora of other headlines saw the case for a larger cut diminished, says Steve.
“Domestically the RBA remains comfortable with the inflation outlook and where policy settings are at,” he says.
“There are signs that the rate cut earlier this year is helping households, though the majority of the cut is being saved – not spent.
“We maintain the view that two more cuts are forthcoming, likely around the quarterly cycle in August and November.”
Meanwhile bonds continue to offer good defensive value in this environment, Steve says.
“And uncertainty surrounding international events ensures plenty of opportunity for active managers.”
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Pendal profile: Meet our head of cash strategies Steve Campbell
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Pendal profile: Meet our head of cash strategies Steve Campbell
Steve Campbell: Labour data will determine timing of next RBA rate cut
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Steve Campbell: Labour data will determine timing of next RBA rate cut
A strong labour market and poor productivity meant the RBA’s rate-cut this week was not a laydown misere.
Was it a “one and done?”
“That’s highly unlikely,” says Pendal’s head of cash strategies, Steve Campbell. “So the focus will now move to when the next policy easing will occur.”
Before the next meeting in April (the first with newly separated monetary and governance boards), we will see updated wage price index data and two labour market reports.
If we don’t see a cut in April, further policy easing could still occur mid-year, Steve says.
The RBA remains “cautious and data dependent”, and didn’t give away much in its notes this week.
“Forecasting trimmed mean inflation at 2.7% until mid-2027 really means we don’t know how it will all unfold.”
Steve Campbell: Shouldn’t the RBA be following suit?
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Steve Campbell: Shouldn’t the RBA be following suit?
Steve Campbell: The RBA isn’t yet convinced inflation is a thing of the past. Here’s why
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Steve Campbell: The RBA isn’t yet convinced inflation is a thing of the past. Here’s why
Steve Campbell: It doesn’t look like the RBA is planning to join the global rate-cuts club soon
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Steve Campbell: It doesn’t look like the RBA is planning to join the global rate-cuts club soon
Steve Campbell: Aussies aren’t likely to see another rate change this year
Steve Campbell: The call for rate cuts appears premature
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Steve Campbell: The call for rate cuts appears premature
CALLS for rate cuts in 2024 now appear premature based on first-quarter inflation data.
Headline inflation rose 1% over the first quarter, resulting in annual inflation of 3.6%. Economists had been expecting a quarterly rise of 0.8% and 3.5% over the year.
The RBA’s preferred inflation measures – the trimmed mean and weighted median – also exceeded expectations by 0.2% for the quarter, rising 1% and 1.1%, respectively.
After moving to a neutral statement in its March meeting, it’s likely the RBA will take a more cautious, hawkish tone in its next statement in May.
That meeting will be accompanied by a monetary policy statement with updated economic forecasts.
From its February forecasts, the RBA sees annual headline and trimmed mean inflation for the year ending June 2024 at 3.3% and 3.6%, respectively.
Headline inflation has risen 2.77% since June 2023 and a trimmed mean of 2.95%. For the RBA’s forecasts to be realised, we need 0.48% and 0.6% for the next quarter.
Inflation forecasting is a tough caper, but if these annual forecasts were to be revised, they would more likely be higher than lower after today’s data.
Steve Campbell: Rate cuts unlikely before November
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Steve Campbell: Rate cuts unlikely before November
There were no surprises on Tuesday with the cash rate left unchanged at 4.35%.
Though the RBA’s statement was more neutral than February, which prompted a rally in bond yields, notes Pendal’s head of cash strategies Steve Campbell.
Where to next?
“Inflation is falling in line with the RBA’s expectations,” says Steve. It’s expected to hit the 2-3% target zone next year and keep falling in 2026.
The RBA could ease policy before then if inflation is falling sustainably. Though services inflation remains elevated, moderating only gradually.
Any rate change is likely to come at the same time as economic forecasts in the RBA’s quarterly monetary policy statement, says Steve.
The RBA can use those forecasts to justify a change in monetary policy settings or tone.
Forecasts are due in May, August and November.
“Any change to the cash rate is not going to happen in the nearer term,” argues Steve.
“November is more likely than August for any policy easing at this stage.”
Steve Campbell: A straight bat from the RBA
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Steve Campbell: A straight bat from the RBA
Those looking for near-term rate cuts from the Reserve Bank will be disappointed with the commentary around this week’s no-change decision.
The RBA retains a tightening bias, refusing to rule out a further increase in rates.
“It’s clear the RBA is not comfortable with where inflation currently sits,” says our head of cash strategies Steve Campbell.
“There have been some solid misses and revisions to the RBA’s forecasts in previous quarters that understandably weigh on their confidence.”
The RBA is responding to inflation – a backward-looking view of the economy, Steve says.
If it wasn’t for elevated inflation, the latest RBA monetary statement lays out an argument for easing to occur sooner rather than later, Steve says.
“This is what the market is looking at when it is pricing in the cash rate to be cut in Australia this year – that, and offshore markets that have priced in aggressive policy easing this year in the US, Europe and England.
“However, we still view any back-up in yields as a buying opportunity.
“The US is still likely to start cutting in May, and if it cuts at every meeting after, will hit 4% by the end of year. This would open up potential cuts later in the year for the RBA.”
Steve Campbell: No rate cuts – or rises – in 2024?
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Steve Campbell: No rate cuts – or rises – in 2024?
Aussies were spared further pain this week when the Reserve Bank left the cash rate unchanged at 4.35%.
In its statement, the RBA retained a tightening bias against an uncertain background.
While investors expect rate cuts offshore next year, Pendal’s head of cash strategies Steve Campbell sees our cash rate unchanged in 2024.
Q4 inflation is due out in late January, ahead of the next RBA meeting in February. Steve expects a headline rate of 0.8%, taking annual inflation to 4.2%.
“We can’t see how the RBA can achieve its end-of-year 4.5% forecast – and 0.3% would be a considerable miss.
“Inflation is likely to come down to 3.5% in 2024. But unless we see significant weakness, this will remain too high to warrant a rate cut.
“Though this won’t stop the market periodically pricing rate cuts in – opening opportunities to trade duration with a long bias into early 2024.”
Inflation won’t go down without a fight, but markets expect extended rate-hike pause
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Inflation won’t go down without a fight, but markets expect extended rate-hike pause
After Tuesday’s rate hike the RBA retains a tightening bias – though there’s nothing in its statement to suggest a follow-up hike in December.
Q4 inflation is out in late January and will determine if a move to 4.6% is required at the first meeting of the year in February, says Pendal’s head of cash strategies Steve Campbell.
Pendal’s income and fixed interest team expects a better-behaved quarterly inflation number – below 1% – which should take pressure off the RBA.
“The RBA is a reluctant hiker,” says Steve. “They’re aware of the lagging impact of monetary policy and they don’t want to overtighten.”
They would also be the stand-out central bank if they continued to raise the cash rate.
Bond markets believe we will join other central banks on an extended pause, notes Steve.
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