Anna Hong: What we learned from the latest RBA minutes | Pendal Group
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Anna Hong: What we learned from the latest RBA minutes


What is the neutral cash rate in Australia? The debate rages on. Pendal assistant portfolio manager ANNA HONG explains

Today’s RBA minutes provide insights into the central bank’s decision making in its last policy meeting on July 5.

The minutes clearly lay out the uncertainty around price risks due to the continued war in Ukraine and China’s Covid-zero policy.

One thing is certain however. There will be another rate hike in August — most probably 50 basis points and a chance it could be higher.

The Reserve Bank expects inflation to peak late in 2022. We are merely a few weeks into the second half.

This means the RBA believes the inflation problem will worsen in the months ahead.

With only one blunt instrument in the monetary toolkit, there is no other option but to raise rates again in August.

How much? The case is much stronger for a rate hike of 50bps or more.

Why? The Australian June Labour report obliterated any lingering doubts that we are in in full employment.

Employment gains almost tripled expectations, leading to an unemployment rate of 3.5% — even accounting for the improvement in participation rate.

There is now one unemployed person per job vacancy in Australia. In other words, filling all our job vacancies will require every single unemployed person.

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Pendal’s Income and Fixed Interest funds

The economy is running red hot and the tightest labour market in almost 50 years is driving consumption demand on an upward trajectory.

The only way to cool off is to slam the brakes hard.

With other central banks raising the hawkishness stakes by hiking rates 0.75% to 1% in each board meeting, it will come as no surprise if the RBA raises cash rates by more than 50bps.

Despite earlier “guidance” indicating the most likely rate hike scenarios are 25bps and 50bps, Dr Lowe may once again have to correct himself.

The RBA governor is well practised on backflips — most notably Yield Curve Control and no rate rises til 2024.

Not surprisingly short rates drifted higher this week.

Longer rates are caught between expectations of higher cash rates and the damage to the economy and potential recession those higher rates may cause.

For now, 10-year Australian government bonds are holding around 3.5% but are vulnerable to drifting back towards 4%, where they were only a month ago.


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.

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