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Tim Hext: What to expect as the RBA takes its foot off the accelerator
The Reserve Bank is easing off the accelerator instead of tapping the brakes. Pendal’s Tim Hext explains what investors can expect next
THE RBA this week enacted what they would view as stage three of the great stimulus unwind.
Stage one was the end of new money in the Term Funding Facility (TFF). This concluded in June, with $187 billion taken up. This was 3-year money, so it runs off from June 2023 to June 2024.
Stage two was capping Yield Curve Control at April 2024. This was done in early July.
And now Stage three this week is a gentle taper of Quantitative Easing (QE) purchases from $5 billion a week to $4 billion – hardly impactful but a signal things are improving.
Future stages will likely see more QE tapering. The RBA is signalling the next review in February next year.
By then total QE will be nudging $300 billion.
We expect QE to be finished by August 2022. Then we adopt a wait and see before any actual tightenings.
The RBA has been very clear this can only occur once inflation is sustainably within the 2-3% band.
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We think it will be there by late 2022, but the RBA wont tighten until well into 2023. A modest hiking cycle up to 1.25% should then follow.
Why do we think any tightening cycle will be modest?
Well, it’s important to remember mortgage rates and deposit rates fell by more than 1.5% in early 2020, despite cash rates only falling 0.65%. This was due largely to the TFF flooding the system with cheap term money.
As the TFF unwinds, it is therefore expected mortgage rates will move higher, independent of the RBA.
Hikes of 1.25% by the RBA will look more like 2% in the real economy. This is more than enough to tap the brakes.
Of course all this assumes a world where vaccines do their job. It also assumes a world where inflation edges higher, but largely behaves.
Time will tell.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
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
About Pendal Group
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at September 8, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.
This article is for general information 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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