Australian Bond Exchange Weekly Update
Friday 5th January
Key points
- Economists expect RBA to cut in September
- Has U.S. inflation finally returned to target?
- ‘Diminished inflation risk’ – FOMC minutes
- Big inflation drop in the UK
- New year new RBA regime
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 4.35%pa and the annual inflation rate in the year to October is 4.9%.
- The US cash rate (policy rate) is currently between 5.25-5.5%pa, and the annual inflation rate in the year to November is 3.1%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 3.9% in the year to November
- The European Central Bank Cash Rate (deposit facility) is 4.00%pa, to fight an annual inflation rate of 2.4% in the year to November.
Happy New Year
Welcome back everyone, we hope you all had a wonderful and relaxing break – with a U.S. election brewing, geo-political spot fires raging, and central banks on the cusp of pivoting to rate cuts, we’re going to need it.
Economist Expect RBA to Cut in September
While rate cuts this year in the U.S., the Euro Area and the UK seem increasingly like a sure thing, the outlook is less clear in Australia where the RBA’s cash rate still sits below the annual inflation rate.
As revealed by a survey conducted by the Australian Financial Review, perspectives from some of the nation’s leading economists have diverged significantly but with the median forecast expecting rate cuts to occur in September.
“We expect rate cuts to commence in the second half of 2024, as the bank will, by then, have successfully put inflation back on a path to target and that a weakening economy will risk pushing inflation below target, justifying rate cuts.”
Alexis Gray, Senior Economist, Vanguard
While senior economists including Luci Ellis from Westpac and Alexis Gray from Vanguard expect rate cuts to materialise from the RBA sometime in the September quarter, some economists like MLC’s Bob Cunneen believe that rate cuts could be arriving as soon as May.
On the opposite side, ten respondents only expected rate cuts to start in 2025 while nine predicted that the RBA would increase the cash rate to 4.6% pa at the first policy meeting of 2024 in February.
Has U.S. Inflation Finally Returned to Target?
In the U.S., the story continues to seemingly get better for the Federal Reserve with the Personal Consumption Expenditure (PCE) price index delivering an early Christmas surprise, falling by 0.1% in November, marking the first decline since April 2020.
The data further reinforces that inflationary pressures continue to subside, underscoring the effectiveness of the Federal Reserve’s monetary policy.
The U.S. bond market is currently pricing in six interest rate cuts in 2024, taking the policy rate into the 3.75% to 4% pa range by year-end.
While inflation in Australia is markedly higher than in the U.S., it continues to ease gradually and consequently, the Australian bond market is also pricing in cuts to official interest rates.
‘Diminished inflation risk’ – FOMC minutes
FOMC minutes released this week reveal that the Fed’s expectation of ‘upside risks’ including goods and services inflation has diminished significantly. The comments come as inflation moderates while the economy continues to grow strongly.
While participants stressed that monetary policy would remain at a restrictive setting for some time, the direction of inflation was heading towards the FOMC’s objective of 2%.
Big Inflation Drop in the UK
Inflation eased significantly in the UK with annual inflation n rate falling to 3.9% in November, down from 4.6% in October.
Food price inflation, one of the biggest drivers of the UK’s cost-of-living crisis, fell from 7.8% in November to 6.7% in December, the lowest level since June 2022.
UK bond markets are now pricing in 145 basis points worth of cuts, with the 10-year gilt yield falling as much as 11 basis points to 3.54% pa.
New Year New RBA Regime
With 2024 now underway, it’s worth reiterating the various changes which are being implemented at the central bank.
Meetings
As part of the renewed regime, the current monthly meeting schedule will be replaced with a six-week schedule (eight meetings per year) which will allow for more informed decision making.
Press conferences will also be held after all meetings rather than the issuance of a press release which is currently the standard procedure.
Dual-boards
A specialist monetary policy board will be established to set and manage official interest rates, while a governance board will oversee the RBA’s day-to-day operations. The establishment of two boards is expected to improve the bank’s decision making and enhance efficiency.
Role and constitution of the board
Members of the RBA board will be expected to challenge the governor and will be expected to take a more active role in decision making including giving one or more speeches or public engagement each year.
Additionally, two new board members will be appointed to the existing nine-member board.
Publication of board votes
Another significant change is that the RBA will be publishing unattributed board votes on interest rate decisions after each meeting, providing a clearer view on the outlook of RBA board members.
While it is uncertain how these changes might impact the RBA’s approach to communication and policy setting, it’s important to be aware of them as we progress into 2024.
Final Thoughts
As we kick off the new calendar year, it’s apparent that the narrative is firmly shifting from rate hikes to rate cuts. As such, it’s important for investors to be cognisant of how their portfolios are positioned and to consider locking in rates now to safeguard against the possibility of diminishing fixed-income returns in the future.
Week Ahead
- Australian monthly CPI indicator
- U.S. inflation data
- UK GDP growth
- Australian balance of trade
*Data accurate as at 05.01.2024
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