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Fixed Interest: What’s next for rates and inflation

What does the RBA’s latest monetary policy statement mean for rates and inflation? Here’s a snapshot from Pendal’s head of cash strategies STEVE CAMPBELL

INVESTOR response to the RBA’s monetary policy statement on Friday was pretty much non-existent.

That’s not surprising since the key updated forecasts were included in Tuesday’s rates announcement, when the cash rate was lifted by another 0.5 percentage points.

Not surprisingly Friday’s statement included sizable upward revisions to inflation forecasts, which had already been flagged when the RBA raised the cash rate by 0.5% in June.

The main downward revisions were to economic growth, dwelling investment and household consumption – not surprising given the increase in interest rates and the economy operating at close to capacity.

The unemployment rate troughs at 3.4% later this year, a downward revision of 0.3% for this year before edging higher.

Regardless, the labour market will remain extremely tight for the next couple of years and wage inflation will follow.

The wage price index was revised marginally higher with annual increases of 3%, 3.6% and 3.9% now forecast for 2022, 2023 and 2024.

Some key points from Friday’s monetary statement:

Inflation
  • Short-term inflation expectations have increased, but longer-term inflation expectations remain anchored
  • Inflation is broad based with about 75% of the basket growing by an annualised rate of 3% or more in the June quarter
  • Fair Work Commission and state government increases will see the wage price index pick up
  • Building materials inflation is now closer to 20%; dwelling construction is about 10% of the inflation basket
  • Passthrough of higher costs continues, though there signs pressure may be easing. (I doubt the passthrough will be quick on the way down)

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Labour market
  • Average employment growth of 51k per month over the past quarter versus an average of 21k jobs in the 12 months prior to the pandemic
  • Employment-to-population ratio hit a record high level of 64.4% in June
  • There are now almost as many vacant jobs as there are unemployed people
  • In response to the tight labour market businesses are offering non-wage incentives; hiring lower-skilled people and offering higher wages
  • Numbers for overseas students and working holiday makers remain low, particularly affecting accommodation and food service sectors
Investment
  • Non-residential construction investment remains constrained by supply issues, weather events and capacity constraints
  • Despite higher prices the mining sector is spending only to maintain existing output rather than investing to expand capacity
Housing
  • Existing investment pipeline remains strong, offering near-term support; but approvals and commencements are responding to higher input prices and interest rates
  • Sentiment is deteriorating with biggest declines in Sydney and Melbourne
  • Advertised rents grew strongly in the first half due to low vacancy rates and household income growth

The RBA’s main forecasts and revisions against the May monetary statement:

Current ForecastsDec-22Jun-23Dec-23Jun-24Dec-24
Trimmed mean inflation653.83.33
Consumer price index7.86.24.33.53
Wage price index33.43.63.83.9
Unemployment rate (quarterly, %)3.43.43.53.74
Employment4.42.21.41.10.9
Gross domestic product3.22.31.81.81.7
Dwelling investment1.72.5-0.1-2.6-4.8
Business investment4.95.96.65.74.6
Household consumption4.92.82.42.32.2
Major trading partner (export-weighted) GDP3.34.83.43.43.5

RevisionsDec-22Jun-23Dec-23Jun-24
Trimmed mean inflation1.41.40.70.4
Consumer price index1.91.91.20.6
Wage price index00.10.10.1
Unemployment rate (quarterly, %)-0.3-0.2-0.10.1
Employment0.50.2-0.1-0.1
Gross domestic product-1-0.8-0.2-0.2
Dwelling investment-2.6-3.2-2.7-4
Business investment-0.1-2.4-1.40.2
Household consumption-0.9-1.6-0.7-0.5
Major trading partner (export-weighted) GDP-0.70.50-0.1
Where to from here

The RBA’s line last week that it is “not on a pre-set path for normalising policy” has been interpreted as the central bank becoming potentially less aggressive.

Inflation data is released quarterly in Australia so we may see the RBA moving in increments of 25 basis points at its next two meetings prior to the release of third-quarter inflation data in late October.

That gets us to a cash rate of 2.35% before a decision on whether a bigger response is needed on Melbourne Cup Day in response to the inflation print.

The inflation forecast of 7.75% seems too high to us. We see inflation as being closer to low 7s for 2022.

Either way it still well above the upper end of the RBA’s 2-3% target band.

We also take the RBA’s forecasting with a massive grain of salt.

As Governor Lowe himself conceded recently, it’s been embarrassing how wrong they’ve been.


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


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at August 9, 2022. PFSL is the responsible entity and issuer of units in the Pendal Short Term Income Securities Fund (Fund) ARSN: 088 863 469. 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. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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