Interest rates: RBA still ahead of the Fed, but another 25-point hike likely before a slow-down in 2023 | Pendal Group
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Interest rates: RBA still ahead of the Fed, but another 25-point hike likely before a slow-down in 2023

Australians should prepare for another 25-point rate hike next month before policy tightening slows in the new year, says Pendal’s head of cash strategies STEVE CAMPBELL

THE US Fed hiked rates overnight by 75 basis points to 4 per cent, but indicated that future hikes may occur in smaller increments.

The key line here was: “the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”.

The market has priced in a terminal rate (essentially the peak of the Fed’s interest-rate cycle) of just over 5 per cent by the middle of next year.

As expected, the Fed remains open to more aggressive moves to tame inflation if needed.

What it means for Aussies

The Reserve Bank of Australia is a couple of months ahead of the Fed when it comes to the cumulative tightening effect.

In early September Governor Phil Lowe dropped a hint that the pace of tightening would slow when he said “the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises”.

The RBA followed through with its decision to tighten less than expected in October when raising the cash rate by 25 basis points.

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The decision to increase the cash rate by a further 25 points to 2.85 per cent on Melbourne Cup Day was in line with expectations.

What of the RBA’s decision?

Most had been expecting a 25-point move this month, in line with the RBA’s move last month.

A higher-than-expected third-quarter inflation number prompted headlines that 50 basis points was a possibility.

The market had assigning about a 20% chance of that.

Consequently, short-dated bank bill futures rallied after the announcement, though volumes were very light.

The RBA revealed some of the economic forecasts that will be included in Friday’s monetary policy statement.

These include:

  • Inflation is now forecast to peak at around 8 per cent later this year, from up 7.75% previously
  • CPI inflation is expected at around 4.75 per cent over 2023 and just above 3 per cent over 2024
  • Economic growth around 3% for 2022, 1.5% for 2023 and 2024
  • Unemployment rate to remain around the current 3.5% before rising to over 4% in 2024 as the economy slows
What’s next?

Further rate increases are expected, according to the RBA.

Key uncertainties remain on the response of household spending to monetary policy tightening and a gloomier global economic outlook.

We believe another 25-point hike is more likely than not in December.

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 mortgages 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.


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.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here


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