Steve Campbell: Expect rates to stay unchanged til 2024

The RBA has again left the cash rate unchanged at 4.1% — which is where it’s likely to remain for the rest of the year, argues Pendal’s head of cash strategies, STEVE CAMPBELL

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PHIL LOWE spared mortgage holders any further pain at his final meeting as RBA boss, leaving the cash rate unchanged at 4.1%.

The decision wasn’t unexpected after rates were left on hold last month.

Apart from adding uncertainty to recent credit concerns in the Chinese property market, there was little change to the accompanying statement.

The RBA believes further policy tightening might still be required — but this will depend on the data and how risks evolve.

No catalyst

There was no clear catalyst that would have caused the RBA to tighten at this meeting.

A glance at key data released since the August meeting shows unemployment rising from 3.5% to 3.7% in July.

The Australian Bureau of Statistics cautioned against reading too much into that.

The last time unemployment rose was in April, which happened to coincide with school holidays.

The bureau also “continued to see some changes around when people take their leave and start or leave a job. It’s important to consider this when looking at month-to-month changes.”

Meanwhile annual inflation fell from 5.4% to 4.9% — weaker than the expected 5.2%.

Taking a deeper dive on the numbers and excluding volatile items (fruit and vegetables, automotive fuel, and holiday travel and accommodation) annual inflation rose 5.8%, down from 6.1%.

Annual rent inflation continued to reflect the tight state of the market and strong demand, rising from 7.3% to 7.6%.

Electricity prices rose 6% in July and 15.7% over the past year. A surge in July was due to annual price reviews that occur each July, though these were partially offset by the introduction of rebates from the Energy Bill Relief Fund.

In all it was a mixed bag, as is often the case.

What it means for investors

Inflation is moving in the right direction and it’s likely the RBA will end the year with the cash rate still on hold at 4.1%.

But any talk of rate cuts in the first half of next year should be discarded (barring a big, external shock).

Inflation has peaked and the move lower will provide comfort for the RBA. But services inflation remains uncomfortably high.

It’s where the sticky level of inflation sits that is key and that will only become apparent in time.

The RBA’s forecasts do not have inflation back within the 2-3% target band until mid-2025.

This is predicated on slowing economic growth, resulting in higher unemployment and easing wage inflation.

Further policy tightening most likely requires these factors to not play out as quickly as the RBA expects.

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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