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What’s next after today’s 50bp rates hike

What’s next after today’s 0.5 percentage point hike? Here’s a quick snapshot from Pendal’s head of cash strategies STEVE CAMPBELL

THE Reserve Bank raised the cash rate by a further 50 basis points today, taking the cash rate to 1.85%.

Further policy tightening will occur in the months ahead, the RBA says.

Size and timing will be determined by the data and the bank’s assessment of the outlook for inflation and the labour market.

We’ll get an updated set of economic forecasts on Friday in the RBA’s next Statement on Monetary Policy.

Today’s release included a preview of those forecasts including:

  • Inflation is forecast to hit 7.75% in 2022; just over 4% in 2023 and around 3% in 2024
  • GDP is forecast at 3.25% in 2022 and 1.75% in 2023-24
  • The unemployment rate is expected to fall further from 3.5% in the months ahead before rising to end 2024 at a still low 4%

The RBA sees household spending as the major source of uncertainty. But it notes people are finding jobs and longer hours.

Labour scarcity is not something that will be resolved anytime soon.

A large amount of fixed rate mortgages are due to reset over the next 12 months — which means some households will face a significant increase in mortgage repayments.

Find out about

cash funds

Higher food and commodity prices are also weighing on consumption.

Where to from here?

A line in today’s statement — that the RBA is “not on a pre-set path for normalising policy” — has been interpreted as the central bank being potentially less aggressive.

Inflation data is released quarterly in Australia so we may see the RBA moving in increments of 25 basis points at its next two meetings — prior to the release of third quarter data in late October.

That gets the RBA to a cash rate of 2.35% before deciding whether a bigger response is needed on Melbourne Cup day in response to the inflation print.

The inflation forecast of 7.75% seems too high to us. We see it as closer to low 7s rather than high 7s for 2022.

Either way it’s still well above the upper end of their 2-3% target band.

We also take the RBA’s forecasting with a massive grain of salt. As Governor Philip Lowe himself conceded recently, it’s been embarrassing how wrong they’ve been.  

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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