RBA expected to pause rate hike for longer

The Reserve Bank of Australia (RBA) is expected to join other central banks on an extended rate-hike pause in the near term, according to Pendal’s Income and Fixed Interest team.

The fund manager’s head of cash strategies, Steve Campbell, said there was nothing in the RBA’s recent statement that would suggest a follow-up hike in December and described the RBA as “a reluctant hiker”.

“They are aware of the lagging impact of monetary policy and they don’t want to overtighten,” he noted.

“They will also be the standout central bank if they continue to raise the cash rate. The US Federal Reserve, European Central Bank and other developed market central banks are all expected to remain on hold in the near term.”

However, Campbell stressed, inflation was expected to remain above the band into 2024 so any sort of relief for mortgage holders would be unlikely anytime soon.

The RBA now forecasts inflation to be around 3.5% at the end of next year (up from 3.3%) and in the high twos by the end of 2025 and economic growth is expected to remain below trend, which should see unemployment rise (though more slowly than previously forecast).

“Fourth-quarter inflation is released in late January and will determine if a move to 4.6% is required at the first meeting of the year in February. We expect a better-behaved inflation number for Q4 – below 1% – which should take pressure off the RBA,” Campbell added.

So, what does it mean for bond investors?

“We expect a further modest rally in the near term – led by offshore factors more than domestic factors for now. A more significant rally would require labour market weakness – something we have yet to see,” Campbell concluded.

The three-year and 10-year bonds finished lower in yield after the RBA announcement, reflecting a more neutral stance in its statement.

On the Melbourne Cup day, the RBA tightened monetary policy by a further 0.25%, taking the cash rate to 4.35%, after the Q3 inflation had exceed its forecasts.