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Anna Hong: What today’s RBA rate hike means for investors
What does the RBA’s latest interest rate hike mean for investors? Pendal assistant portfolio manager ANNA HONG explains
TODAY’S RBA rate hike of 50 basis points is no surprise – it’s coming off a low base.
The delay in lifting rates at the start of the year means we have a lot of ground to cover, just get back to neutral.
This month’s hike – which takes Australia’s official cash rate to 1.35% — is about tackling actual inflation.
Further hikes in coming months will be about tackling inflation expectations which are just as important to get under control.
This time last year we might have thought inflation was something that happened to others, but not here in Australia.
It’s now apparent that we are not different – just delayed. The delay has some upside though, since other developed economies can provide some guidance of what’s in store:
| New Zealand | US | Canada | UK | Australia | |
|---|---|---|---|---|---|
| Policy rates | 2% | 1.75% | 1.5% | 1.25% | 1.35% |
How high can this go?
Guidance aside, what everyone wants to know is: “How high can this go?”
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Pendal’s Income and Fixed Interest funds
Australians have more say in the answer than we may realise.
While tackling inflation is now the number one priority, the RBA has no desire to send us into recession just for the sake of it.
That’s why the central bank is doing this delicate dance of 0.5% hike-and-see instead of breaking the economy with a one-off 2%-3% sledgehammer hit.
The Reserve Bank is trying for a soft landing. To achieve that, a few things need to dovetail for demand and supply to reach stable prices:
- A pick-up in the global supply chain: This inflation cycle is supply induced. The faster the supply chain issues ease, the more the inflationary pressures will ease.
- Evolution of household spending: Consumption growth is dragging prices higher while supply bottlenecks make it hard to keep up. Australian households can slow rate hikes by reducing consumption. That would allow time for supply to catch up without the RBA hiking rates by an ever-increasing amount. Recent NAB data shows we are already starting to adapt and evolve.
- Prevent a wage-price spiral: If workers are fully compensated for the increased cost of living, no personal consumption belt-tightening will be required. A merry-go-round of ever-increasing money chasing limited goods and services will lead to sustained higher inflation requiring more hikes. Counterintuitively, accepting a real wage cut will lead to long-term gains for the greater good.
No pain, no gain. It is unpleasant to cut consumption, and no one wants a cut in real wages.
But a protracted rate hike cycle will send the Australian economy into a recession, which is no good for anyone. We have a say in how high RBA’s Cash Rate Target will be. It’s time to exercise that power.
About Anna Hong and Pendal’s Income and Fixed Interest team
Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.
Find out more about Pendal’s fixed interest strategies here
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at July 5, 2022.
PFSL is the responsible entity and issuer of units in the Pendal Monthly Income Plus Fund (ARSN: 137 707 996) and Pendal Dynamic Income Fund (ARSN: 622 750 734) (Funds). A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.
An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.
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