Anna Hong: Investors will be looking for a ‘sensible’ budget | Pendal Group
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Anna Hong: Investors will be looking for a ‘sensible’ budget

In the current environment tightening must come from a big reduction in government spending to support private sector growth, says assistant portfolio manager Anna Hong

THE RBA’s Financial Stability Review sheds light on last week’s decision to limit the cash rate rise to 25bps.

It shows the Reserve Bank is keeping a close eye on the ability of households to absorb the impact of rate rises instead of blindly following other central banks.

In this world of instant gratification the effect of monetary policy is no different. If inflation has not reversed since the last hike, let’s go again, more this time.

Our collective impatience meant the Reserve Bank’s decision to hike 25bps stuck out like a sore thumb in a sea of 50bps and 75bps rate hikes from other central banks.

These consecutive rate hikes ignore the fact that the cash rate target is a blunt instrument that requires time to trickle into the economy.

Its ability to control demand in a supply-shocked environment is made even harder by large-scale Covid stimulus programs we’ve seen in most of developed economies.

In Australia, the fiscal stimulus – JobKeeper, JobSeeker – was effective because it skipped part one of the song and went straight to part two – the household balance sheet.

Interest rates alone will not be sufficient to unwind demand supported by the lingering effects of the stimulus.

The federal government will need to deliver a sensible budget to help the RBA keep the Australian economy on track.

Despite signs of a roaring economy – real GDP growth, low unemployment, strong business conditions – household nerves about the future have led to near-historic lows in consumer confidence.

A never-ending increase to interest debt-servicing costs will only make consumers more pessimistic, eventually hurting business profitability in the form of lower consumer demand and higher cost of credit.

Fiscal policy is the circuit breaker required to stop that trajectory.

Productivity drives real growth. That comes from private sector growth.

In the current environment, tightening must also come from a large reduction in government spending so the private sector can take over. 

A productivity-driven expansion will ensure the economy stays on the right track with a lift in real wages, ultimately creating sustainable growth.

Are we still the lucky country? The upcoming federal budget will paint a better picture of what’s ahead.

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Pendal’s Income and Fixed Interest funds


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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