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What this week’s rate rise means for cash investors

What’s next for rates and what does it mean for investors? Here’s a quick overview from Pendal’s Head of Cash Strategies STEVE CAMPBELL

THE Reserve Bank wrong-footed the market this week when it raised the cash rate by 0.25% to 0.35% — compared to consensus expectations of 15 basis points.

The inflation data in late April was too much to stomach.

You might as well lock in a 40-basis-point increase for June now to get the cash rate back to 0.75%.

The cash rate now looks as though it will be closer to 1.75% by the end of the year.

What’s next?

Ahead of updated forecasts that we’ll receive in their Statement on Monetary Policy this Friday, Tuesday’s statement revealed the following RBA forecasts:

  • Unemployment to fall to 3.5% in early 2023
  • GDP to grow 4.25% in 2022 and 2% in 2023
  • Inflation around 6% in 2022 and underlying inflation around 4.75%
  • Headline and underlying inflation moderating to about 3% by mid-2024

Forecasting has never been more difficult with conflict in Ukraine driving commodity prices, supply chains affected by China’s zero-Covid policy and a domestic unemployment rate not seen in 50 years.

The RBA’s forecasts previously have missed the mark by a fair way, so I am not giving too much weight to what they are saying with their longer-dated forecasts.

Things change quickly.

It was only two months ago that the RBA board was prepared to be patient.

They are more likely to panic in the coming months as other central banks raise rates by 50 basis points, starting with the Federal Reserve later this week.

Throw the Canadians and Kiwis in the 50 rate hike club as well.

The RBA is not quite in the same situation as the Fed, which has acknowledged it is behind the curve. (In the US the starting point for inflation was higher, the labour market tighter and wage inflation was picking up quickly.)

But they are still behind where they want to be — 0.1% was held for too long in hindsight.

Find out about

cash funds

What does this mean for investors?

Six-month yields are likely to sit closer to 1.65% (from 1.48% pre meeting) so better days are ahead.

Those sitting in term deposits may enjoy having their deposits valued at par — but they are accruing at a much lower rate than other opportunities in the market.

Investor should be wary of investing in short-dated TDs for cash funds.

First and foremost, cash should be there to provide liquidity at all times while preserving capital.

TDs are great at preserving capital. But their liquidity? It’s almost quicker to sell a house than wait for TDs to mature.

I expect spreads to widen on RMBS (residential mortgage-backed securities, or mortgage bonds).

I expect we’ll see more volatility, even by cash fund standards in the coming months.

“It’s also why I think Pendal Stable Cash Plus Fund is well placed in this environment.

“Short-dated, highly liquid assets will quickly reflect the changes that the RBA will deliver in the coming months.”

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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