Cup Day hike, split field: Is the RBA done?

Another hike, a divided board and a bond market betting the RBA is done, Pendal’s Head of Cash Strategies STEVE CAMPBELL explains what today’s decision means for investors

THE Reserve Bank of Australia (RBA) tightened monetary policy by a further 25 basis-points, taking the cash rate to 4.85 per cent, the highest level since 2008.

The market had priced the move as being all but certain.

Interestingly though for future rate expectations, there was a 6-3 split vote. It will be interesting to see if any further insights are shared about why the three dissenters voted that way. Three-year bonds are 5 basis points lower in yield at the time of writing.

There will be the usual headlines about the pain being experienced by mortgage holders following today’s announcement. However, not everyone loses out of today’s decision.

Monetary policy affects those on lower incomes more. In Australia roughly one-third of households own their house without a mortgage and often with decent savings. So their ability to increase their income has risen following today’s announcement.

Around one-third of households own a house with a mortgage and the other third rents. Of those households with a mortgage some no doubt will be experiencing difficult conditions. Particularly those first home buyers that participated in the Australian Government’s 5 per cent Deposit Scheme before the government announced changes to negative gearing at the May Budget.

A look at the RBA’s Financial Stability Report released in October shows, however, that the bulk of households are in solid financial shape. The following graph shows the level of mortgage prepayments by quartile.

The graphs if anything indicate that buffers have increased over 2026 despite rates moving higher. Some of this makes sense.

If a household has savings elsewhere (equities etc) then the higher rate on their mortgage makes paying it down more attractive against other investments.

And for renters?

You don’t need me to point out that this latest decision puts upward pressure on renters as landlords seek to recover higher interest expenses. That doesn’t play out immediately though.

Obviously, there are other sectors outside of households affected by today’s decision. Some sectors are struggling. Property developers are having a tougher time now. Input costs have increased; rates are moving higher at a time when dwelling prices are coming off.

The rise in the fuel price is squeezing margins and the extent of second round effects from the surge is still to play out.

As an aside, this was one of the reasons that the Bank of Canada cited when tightening policy last week when it was not expected.

Second round effects are expected to play out over the next 12 months, and to prevent inflation expectations becoming embedded it was viewed as being more prudent to tighten.

So how does the RBA see things going forward?

The RBA released an updated set of economic forecasts via its Statement on Monetary Policy. The following tables show the updated forecasts and revisions since August.

There are some solid upward revisions to trimmed mean inflation out to the end of 2027.

The Brent crude oil price in the RBA’s assumptions for December 2026 rose by 35 per cent to $109.50 so it is not surprising there were hefty revisions to trimmed mean and CPI forecasts.

Gross domestic product (GDP) was revised down solidly, with the decline in dwelling investment and household consumption all weighing on the outlook. Business investment remains strong in the nearer term driven by data-centre expenditure.

What to expect

The supply side of the global economy continues to be affected by things outside of the RBA’s control.

How long the conflict remains unresolved in the Middle East is anyone’s guess. No one would have thought that four years later hostilities between Russia and Ukraine would still be ongoing.

Economic growth here and abroad has been supported by the large capital expenditure required for data centres and the artificial intelligence rollout.

For Australia this won’t add much to economic growth. Most of the components required to build are imported and detract from net trade on the national accounts. It is, however, short term inflationary.

Competition for resources, including labour, is putting upward pressure on other sectors. Competition for the components required to build the chips necessary will also spill over into potentially higher computer costs, iPhones etc. The RBA pointed to these factors when revising up its inflation forecasts.

Immediately following the latest RBA hike, three-year bond yields rallied to the point that they are now below the cash rate. The bond market is saying that the RBA may be done following the split vote. This is not the first time they have had a split vote – the March meeting was 5-4 when it hiked.

Forecasting is tough at the best of times. Rarely has it been more difficult than now.

Further tightening can’t be ruled out, particularly if Middle East hostilities continue and the AI boom supports Australian investment and our trading partners’ economic growth.

An end to hostilities, however, and a rapid fall in the fuel price and suddenly the inflationary pressure valve is released.

It would also help if our productivity improved, but that is not going to happen anytime soon. And certainly not the day after the Melbourne Cup.

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.

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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 Managed Cash 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