The Point

Steve Campbell: RBA likely to wait for April data before a move in May

The RBA is getting close to pausing, but another rate rise is probable in May, says Pendal’s head of cash strategies STEVE CAMPBELL

The Reserve Bank lifted the cash rate for a tenth consecutive meeting earlier this week – up 0.25 percentage points to 3.6%.

“When and how much further interest rates need to increase” would depend on “developments in the global economy, trends in household spending and the outlook for inflation and the labour market”, the RBA said.

The next Australian labour market data is due on March 16.

Steve Campbell: Is it time to get into TDs? I say no, no, no

It’s a bad take on Amy Winehouse, but ‘no, no, no’ is bang-on when it comes to investing in term deposits right now, says head of cash Steve Campbell.

“The TD question is increasingly coming up as the Reserve Bank moves closer to pausing monetary policy tightening,” says Steve.

“In early 2022, after being starved for yields over an extended period, investors were awestruck with 1%+ yields on offer for 12-18-month tenors.

“At the time it looked great. I doubt those who locked in are feeling so happy now about the decision to tie liquidity up in a lower yielding asset.”

While there are a range of important differences between TDs and cash funds – including higher risk and price volatility for cash funds – Steve reckons access to liquidity will remain important this year.

“This year may not be as volatile as 2022, but I doubt calm waters lay ahead for the rest of 2023.”

Steve Campbell: RBA likely to move to quarterly tightening in 2023

“Next year should see things change however, with policy tightening likely limited to one or two hikes.

“For many race-goers Tuesday was a tough day. That’s also the case for households with a variable mortgage.

“For households with fixed-rate mortgages mid-2023 and beyond is when the pain is really set to kick in with mortgage repayments about to increase sharply.

“The RBA is more than aware of this. It’s a reason not to overtighten in the first half of 2023.”

What the Reserve Bank’s 0.5% rate rise means for investors

After this week’s higher-than-expected rate rise, will we see a cash rate close to 3% by the end of 2022?

“The cash rate has been held too low for too long and the RBA is behind the curve,” says Pendal’s head of cash strategies Steve Campbell.

“They are moving more quickly to get closer to neutral. I view 50 basis points next month as more probable than 25.”

Are markets right about a cash rate closer to 3% by year’s end? “Market pricing is aggressive, but at the moment I wouldn’t rule anything out,” Steve says.

Markets are looking for another 3% of rate hikes in the next 12 months — but is the economy ready?

“The RBA tried to imply the economy would be resilient. But the tide is now going out.

“The first 1.5% of hikes will see belt-tightening, but probably no more. However the next 1.5% could see actual stress, especially in housing.

“This is an experiment the RBA hasn’t undertaken for more than a decade — and risks of a policy error are rising.”

Michael Blayney: Three investing rules for turbulent times

Emotion can overwhelm strategy when markets are volatile. Pendal’s multi-asset chief Michael Blayney has three simple rules to remember in times like these:

1. Don’t Panic: A well thought-out and documented philosophy and process is crucial to any active decision making during volatility. This helps you stay disciplined despite the noise. It’s easy to get swayed by emotion, or worse still, enter a crisis at a risk level that wasn’t right for you to begin with.
2. Look for opportunities, but at least rebalance: Disciplined rebalancing adds to returns and reduces risk over time, compared to letting a portfolio run.
3. Diversification Matters: Diversified investors know there’s always going to be some part of their portfolio that’s not working as well as others. Then the cycle turns and they need that part of the portfolio. That cycle can take a decade so an investor must be able to cope emotionally with an underperforming asset for a period. Always include enough liquidity (cash) for your short-term needs. You never want to be a forced seller.

What this week’s rate rise means for cash investors

The cash rate now looks like it will be closer to 1.75% by the end of 2022 after this week’s jump to 0.35%.

“It’s better times ahead for cash investors, though the speed of the move has not been without some pain,” says our head of cash strategies Steve Campbell.

Six-month yields are now likely to sit closer to 1.65%, up from 1.48%, says Steve.

“Those sitting in term deposits may enjoy having their deposits valued at par — but they are accruing at a much lower rate than other opportunities in the market.”

Investors should be wary of short-dated TDs.

“First and foremost cash should be there to provide liquidity while preserving capital. TDs are great at preserving capital. But liquidity? It’s almost quicker to sell a house than wait for TDs to mature.

“I expect we’ll see more volatility, even by cash fund standards in the coming months.

“Short-dated, highly liquid assets will quickly reflect the changes that the RBA will deliver in the coming months. It’s why I think our Pendal Stable Cash Plus Fund is well placed in this environment.”