Blog RBA Holds Firm as Inflation Moderates: Navigating the Bumpy Road Ahead Despite recent market expectations, the RBA’s next move is more likely a rate cut than a rate hike.
At their May meetings, both the U.S. Federal Reserve (Fed) and the Reserve Bank of Australia (RBA) decided against adopting the more hawkish policy stance that markets had priced in. This restraint sparked a rally in bond markets following the meetings and indicated that the threshold for any future rate increases is higher than some market participants anticipated. Central banks exercise caution in the face of inflation surprises Despite encountering stronger-than-anticipated jobs and inflation data this year, both the Fed and the RBA have maintained a cautious approach, contrary to market expectations of further rate hikes. The decisions of these central banks were influenced by several key factors: Balanced mandate considerations: As inflation moderates, both central banks are adopting a more balanced approach in fulfilling their dual mandates of price stability and full employment. This balanced focus is crucial now that inflation, though reduced, remains above target levels (see chart below). Stable inflation expectations: Despite the fluctuations in short-term inflation rates, longer-term inflation expectations—both market-based and surveyed—have remained remarkably stable. This consistency in expectations for long-term inflation is a vital element in the central banks' current policy stance, allowing them to adopt a wait-and-see approach. Contraction in inflation drivers: The factors driving inflation are increasingly focused on specific sectors like housing, which are influenced more by supply-side issues than by broad economic demand. Pause in disinflation: Although the process of disinflation has paused, there has been no significant resurgence in inflation rates, allowing central banks the flexibility to maintain current interest rates without tightening further. Future rate movements: What investors should watch The nuanced approach of the Fed and RBA suggests that while additional rate hikes remain a possibility, their likelihood is lower than many fear. The central banks' current priority appears to be the preservation of employment gains rather than combating inflation aggressively. This scenario tilts the balance towards maintaining current rates or potentially cutting them should economic conditions deteriorate, offering a strategic advantage for bond investors. Investment strategies in a high-rate environment With interest rates remaining elevated, their impact on the economy is significant and likely to suppress any immediate need for further hikes. This situation offers investors a chance to lock in higher yields and potentially benefit from future rate cuts being priced into the market. Bond funds are currently offering an attractive yield ranging between 5% and 6%, presenting a compelling case for investment. In summary, the cautious approach by the Fed and RBA reflects a complex balancing act between fostering economic stability and managing inflationary pressures. While the journey back to the inflation target will likely be uneven and challenging, we believe that the RBA’s next move remains more likely to be a rate cut than a rate hike. Find out more about how to access today’s attractive opportunities in bonds here.
Economic Outlook Facing the Music: Challenges and Opportunities in Today’s Commercial Real Estate Market Embracing resilience in CRE amid unprecedented challenges
Economic and Market Commentary Major Shakeup in U.S. Election Diminishes Odds of a Republican Sweep With Vice President Kamala Harris likely to be the Democratic nominee, the race for the White House has shifted and congressional Democratic prospects have improved.
Economic and Market Commentary Developed Market Public Debt: Risks and Realities In the post-pandemic fiscal landscape, government debt trajectories may be volatile, but appear broadly sustainable.
Economic and Market Commentary ECB: Next Stop, September While the European Central Bank kept policy rates unchanged, the next cut is likely to be delivered soon.
Economic and Market Commentary June CPI Marks Progress Along the Last Mile to Inflation Target A second straight month of encouraging U.S. core CPI data supports an initial Federal Reserve rate cut as early as September.
Economic and Market Commentary Navigating Public and Private Credit Markets: Liquidity, Risk, and Return Potential Comparing public fixed income and private credit markets involves weighing factors related to liquidity, transparency, credit quality, risk premium, and opportunity costs.
Rethinking Bonds: Why Fixed Income Should Be on Your Radar Today The fixed income market has experienced dramatic transformations over the past couple of years, offering new opportunities for investors.
Economic and Market Commentary May 2024 Update from the Australia Trade Floor Portfolio manager Aaditya Thakur discusses why, despite recent market expectations, the RBA’s next move is more likely a cut rather than a hike.
Blog As Global Rates Shift, Opportunities Arise for Australian Investors Against the backdrop of an evolving monetary policy landscape, Australian bonds present a compelling case for investment.
Economic and Market Commentary The Cost of Cash: A $6 Trillion Question In this PIMCO Perspectives, we examine how the return of elevated bond yields comes at an opportune time to consider shifting out of cash.