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Inflation won’t go down without a fight, but markets expect extended rate-hike pause

Bond markets believe the RBA will join other central banks in an extended pause after this week’s rate rise. Pendal’s STEVE CAMPBELL explains

IF THE Melbourne Cup was not already a tough experience for some, the Reserve Bank added further pain for mortgage holders when tightening monetary policy by a further 0.25% on Tuesday, taking the cash rate to 4.35%.

When third-quarter inflation exceeded RBA forecasts, it was too much for the central bank to bear.

The RBA acknowledged “the risk of inflation remaining higher for longer has increased”.

In their statement the Reserve Bank revealed some updated economic forecasts, which will be fully revealed on Friday with the next monetary policy statement.  

The RBA now forecasts inflation to be around 3.5% at the end of next year (up from 3.3%) and in the high twos by the end of 2025.

Economic growth is expected to remain below trend, which should see unemployment rise (though more slowly than previously forecast).

And a key line in the statement remains: wages growth is consistent with the inflation target “provided that productivity growth picks up”.

Pendal's head of cash strategies, Steve Campbell
Pendal’s head of cash strategies, Steve Campbell

I would be hopeful, more than confident on that.

Where to from here?

The RBA retains a tightening bias, though there is nothing in its statement to suggest a follow-up hike will occur in December.

Fourth-quarter inflation is released in late January and will determine if a move to 4.6% is required at the first meeting of the year in February.

We expect a better-behaved inflation number for Q4 – below 1% – which should take pressure off the RBA.

The RBA is a reluctant hiker. They are aware of the lagging impact of monetary policy and they don’t want to overtighten.

They will also be the standout central bank if they continue to raise the cash rate.

The US Federal Reserve, European Central Bank and other developed market central banks are all expected to remain on hold in the near term.

Inflation is expected to remain above the band into 2024, so the RBA is not likely to bring relief to mortgage holders anytime soon.

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cash funds

It simply isn’t going down without a fight.

What it means for bond investors

Bond markets certainly believe we will join other central banks on an extended pause.

After Tuesday’s announcement three-year and 10-year bonds finished lower in yield, reflecting a more neutral stance in the RBA statement.

We expect a further modest rally in the near term – led by offshore factors more than domestic factors for now.

A more significant rally would require labour market weakness – something we have yet to see.

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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