Steve Campbell: A straight bat from the RBA

The Reserve Bank played a straight bat on rates, as expected. Here’s what it means for investors, according to our head of cash strategies STEVE CAMPBELL

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No change to the cash rate from the Reserve Bank (RBA) today, as was widely expected.

The RBA did retain a tightening bias, stating that “a further increase in interest rates cannot be ruled out”.

Yields spiked following the RBA’s decision, before recovering into the close – with three-year bond yields ending unchanged.

What was also released today were the latest set of economic forecasts in the RBA’s Statement on Monetary Policy (SoMP).

Previously, this would have been released on the Friday following the meetings held in February, May, August and November and provided a useful justification for any change to policy at the preceding meeting a few days prior.

It also helped that the quarterly inflation data was fresh off the press leading into those meetings.

Forecasts revised down

So, what were the main takeaways from the latest set of forecasts?

Economic growth was revised down by 0.2% to 1.8% for 2024, with both household consumption (-0.4%) and dwelling investment (-1.5%) key drivers behind the downward revision.

Inflation is forecast to be back within the target range by the end of 2025 and back to around the mid-point by mid-2026.

Nearer term, however, inflation is forecast to be lower than previously expected, with trimmed mean for the year ending June 2024 and December 2024 revised down by -0.3% and 0.2%.

These were cut by more than we thought and leave risks symmetric in terms of whether they are missed to up or downside.

Post-meeting media conference

Today also marked the start of a new era, with Governor Bullock holding a press conference following the announcement.

Inflation misses relative to November’s inflation forecast was one question that came up.

Goods inflation was pointed to as the reason for the miss, with elevated services inflation remaining a concern.

It is clear that the RBA is not comfortable with where inflation currently sits.

There have been some solid misses and revisions to the RBA’s forecasts in previous quarters that understandably weigh on their confidence.

August’s forecasts were too low – and coupled with the line that the RBA had a low tolerance for higher-than-expected inflation at the October meeting, the central bank left itself with little room other than to hike the cash rate in November.

The November forecasts saw a large upward revision to inflation forecasts and subsequently undershot.

Inflation forecasting is difficult – we are not questioning that.

By cutting the inflation forecasts again in February, what the RBA does not need to follow up with is another line about a low tolerance – had it not cut its February forecasts by as much, it would have given itself a bit more leeway should inflation overshoot in the coming quarters.

On a side note, one line of questioning that seems to have been misunderstood from the SoMP relates to the path for the cash rate.

The SoMP contained an assumptions table, including the cash rate. The assumptions had the cash rate at 3.9% by the end of 2024 and 3.4% by the end of 2025.  

These are not the RBA’s cash rate forecast.

As per notes to the statement, the cash rate expectations in the SoMP are derived from financial market pricing and surveys from professional economists.

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What does this mean for investors?

Those looking for the RBA to cut in the near term will be disappointed.

The RBA is responding to inflation, a backward-looking view of where the economy is at.

Indeed, if it wasn’t for elevated inflation, the case from other forecasts out of today’s SoMP would be for monetary policy easing to occur sooner rather than later.

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 in the United States, Europe and England over the course of 2024.

However, we still view any backup 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% Fed Funds by the end of year. This would open up potential cuts later in the year for the RBA.

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