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Rate rise: What’s next after RBA waves the white flag

The RBA’s credibility has taken a hit, but it can now get on with normalising policy like most other developed market central banks, says Pendal’s TIM HEXT

TODAY’S RBA announcement indicates rates are headed back to neutral (at least) and stagflation has arrived.

The RBA has finally capitulated on what was obvious to everyone else – inflation isn’t going to behave and the time for accommodative monetary policy has long passed.

Other central banks got the memo late last year but the RBA clung to the idea that inflation was temporary and would behave itself.

Now its forecasts are for headline inflation at 6% this year, underlying at 4.75% and only/maybe falling back to 3% by mid-2024.

That last forecast assumes they have tightened rates back to neutral.

The Reserve is now wary of giving too much guidance. But it’s trying to make up for lost ground, assuring everyone it will do “what is necessary to ensure that inflation in Australia returns to target over time”.

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Pendal’s Income and Fixed Interest funds

This is a little short of “whatever it takes”. But it opens the possibility of tight monetary policy (above 2.5%). The market certainly thinks so as cash rates in the market for 2024 nudge above 3.5%.  

This should concern not only bond holders, but holders of all financial assets as the RBA seems to be no longer separating supply-led and demand-led inflation.

Given its lack of ability to control supply-led inflation, it sounds like the RBA is prepared to hit demand harder than previously thought… Not that different to the US Federal Reserve after all.

The RBA also confirmed it will not be reinvesting maturing bonds — and not selling any of its holdings.

This glide path to a smaller balance sheet can be called Quantitative Tightening (QT) — but is largely what everyone expected and really is a sideshow.

The RBA will feel relieved that what must have been a constant stress of being so far behind the market is now over.

Their credibility has taken a big hit. But they can now get on with normalising policy, just like every other developed market central bank (okay, except the Bank of Japan).

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 an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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