Tim Hext: Rates are important – but not as much as the Budget

Monetary policy gets the headlines — but investors would be wise to pay more attention to fiscal policy, argues Pendal’s TIM HEXT

• Budget decisions dwarf rate changes
• Fiscal policy to dictate if going into recession.
• Find out about Pendal fixed interest funds

WHILE Australia focused on the RBA’s 10th rate rise in a row this month, Team Albanese was working in the background on the May federal budget.

The March rate rise added about $7.5 billion to repayment schedules across the nation.

By comparison, the May Budget will include hundreds of billions of dollars in spending initiatives and cuts, impacting all parts of the economy.

Why does monetary policy get so much attention?

Which is more important for investors: monetary or fiscal policy?

“We’ve built a whole system around monetary policy and the wisdom of the independent central bank,” says Tim Hext, head of government bond strategies at Pendal.

“But fiscal policy doesn’t get enough attention.

“Fiscal policy is more likely to determine whether or not Australia is going to have a recession,” he adds.

Monetary policy – movements by the Reserve Bank in the official cash rate, which is used as a basis for other lending rates – is conveyed regularly, normally 11 times a year after central bank board meetings.

Fiscal policy – the government’s spending policies – normally has only two spotlight events.

The first is the annual budget on the second Tuesday of May, and the second is the mid-year economic and fiscal outlook (MYEFO) about six months later.

The power of monetary policy comes less from the actual movement in interest rates, and more from the secondary round impact on asset prices, Hext says.

“The direct impact of monetary policy might not be that huge, but if it causes a boom in asset prices, such as people’s homes, it’s going to make people feel wealthier,” Hext says.

There is about $3 trillion of debt in the economy, Hext says.  About $1.2 trillion is held by foreigners and the rest is local – Australians lending to Australians.

Therefore the net impact of a one per cent rate hike on the economy is only $12 billion. The other $18 billion of payments are between Australians.  

“After 3.5 percentage points of hikes we are $42 billion a year worse off,” Hext explains.

Fiscal policy the main game

“The government spent $250 billion during Covid. Fiscal policy remains the main game for people’s pockets and the economy.

“It explains why the Australian economy is proving more resilient to rate hikes, at least for now.”

Hext says in a world of four per cent wage growth, bracket creep means fiscal policy is tightening.

Bracket creep occurs when income growth causes individuals to pay higher average income tax each year.

Stage 3 tax cuts, legislated for the middle of next year, will reverse bracket creep, assuming they go ahead.

“Tight fiscal and monetary policy will be a major headwind through 2023 and the Federal Budget in May should confirm this,” he says.

“In essence, fiscal policy just doesn’t get enough attention.”

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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

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About Pendal Group

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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