ABE Weekly: CPI Index Shows Inflation Easing

Australian Bond Exchange Weekly Newsletter

Friday 28th April 2023

Key Points

Latest CPI Index shows inflation is easing, down 80 basis points to 7%
Price pressures in housing could see the cash rate increase next week
Why another interest rate hike could benefit fixed income investors
ABE’s Monthly Webinar shares benefits of Centuria’s “Early Call”

Global Cash Rates & Inflation*

The RBA Cash Rate is at 3.6% and quarterly inflation sits at 7%, the next RBA meeting is 2 May 2023
The BOE Cash Rate sits at 4.5%, inflation at 10.1%, with the next meeting set for 11 May
US Federal Reserve cash rate (policy rate) is currently at 4.83% and inflation sits at 5%, with the next review date on 3 May
The ECB Cash Rate is at 3.5% and inflation is at 6.9%, with the next review set for 4 May

Latest CPI Index shows inflation is easing, down 80 basis points to 7%

This week, the Australian Bureau of Statistics (ABS) released Consumer Price Index (CPI) data for March 2023, incorporating a new dataset of information on private sector rentals to provide new insight and better measurement of the CPI.

Quarterly CPI data, which is the primary dataset used by the Reserve Bank of Australia (RBA) to measure household inflation, showed the CPI rose 7% over twelve months to March 2023, down 80 basis points from the last ABS release in December 2022.

CPI increased 1.4% from the December quarter in 2022 to the March quarter in 2023, primarily driven by medical and hospital services (+4.2%), tertiary education (+9.7%), gas and other household fuels (+14.3%), and domestic holiday travel and accommodation (+4.7%).

Although the Monthly CPI indicator data reported a significantly lower 6.3% inflation rate, these indicators are still high above the RBA’s target of 2-3%.

Price pressures in housing could see the cash rate increase next week

According to the CPI Index, housing expenditure remains one of the largest price pressures in the Australian market at present. Although the cost of building a new dwelling dropped from 21% last year to 13% in March 2023, the new data shows rental prices have increased by 4.9% and according to Michael Read at the Australian Financial Review this is “the fastest pace of rent inflation in more than a decade.”

This strong CPI outcome suggests that the RBA could be hiking interest rates at their meeting next Tuesday, regardless of the slight drop in inflation, as they battle with an historically low unemployment rate and a cost-of-living crisis.

Why another interest rate hike could benefit fixed income investors

If the RBA’s response to inflation is to continue to hike interest rates, fixed income investors could benefit as the stock market becomes more volatile in response to economic conditions.

Why? Bond investors make money through regular coupon payments at a fixed rate until the maturity date, whilst equity investor returns can vary substantially. According to John O’Sullivan at The Economist; “stocks surge when the economy soars; bonds climb during a crisis. A mix of the two—often 60% stocks and 40% bonds—should help investors earn a nice return, without too much risk.”

In such an uncertain economic environment, rising interest rates are also impacting savers, as the cash deposit rates of banks and other cash depositories such as the ABE cash deposit account have been increasing savings rates in lock step with the RBA’s cash rate hikes. In Bill O’Donnell’s opinion, interest rates strategist at Citi, “now is the golden age for savers, at long last.”

ABE’s Monthly Webinar shares benefits of Centuria’s “Early Call”

On Wednesday, ABE advisers hosted the Monthly Webinar, discussing the drop in housing price valuations as the mortgage cliff fast approaches. The mortgage cliff, which describes the switch for many mortgage holders in the Australian market from low fixed rate to higher variable rate mortgages, could see homeowners feeling the pinch.

Further, the team discussed the recent “Early Call” from Centuria, which saw ABE investors’ bond principal and accrued interest repaid in full earlier than the 2024 maturity date. This is an exciting time for these investors as the opportunity arises to diversify investments further into recently issued Credit Linked Note available from ABE including the latest 6.25% fixed coupon rate 2026 Flight Centre C2 Market Linked Security.

Join us on next month’s webinar now to keep informed of the latest updates in the Australian bond market. Click here to sign up if you’re an ABE Member. Click here for non-members.

*Data accurate as at 27.04.2023

Disclaimer: The information and any advice provided in this newsletter has been prepared without considering your objectives, financial situation or needs.  Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things. You should obtain the relevant appropriate document for any product mentioned and consider its contents before making any decision.