Australian Bond Exchange Weekly Update
7th June 2024
Key points
- Bank of Canada cuts
- European Central Bank cuts
- Governor Bullock warns on higher rates
- Australian GDP growth slumps
- Aussies spend up on overseas travel
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 May is 3.6%.
- The US cash rate (policy rate) is currently between 5.25%-5.5%pa and the annual inflation rate in the year to April is 3.4%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 2.3% in the year to April.
- 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 April.
Governor Bullock Warns on Higher Rates
In comments made this week, Michelle Bullock reiterated that the Reserve Bank of Australia wouldn’t hesitate to “move and raise interest rates again”, should there be a lack of progress on inflation.
While the rate of inflation has eased significantly from 8.4% in December 2023 to 3.6% in May 2024, rising real wage growth, looming tax cuts, and energy rebates could see inflation reignited.
Bullock also stated that while the RBA could aim to bring inflation back to its 2-3% target more quickly, the central bank has opted for a more gradual approach to preserve Australia’s strong jobs market.
Australian GDP Growth Slumps
Australia’s latest GDP figures for the March quarter revealed a significant slowdown, with the economy growing by a meagre 0.1%.
The quarterly figure was slightly below market expectations, leading to a reduction in the annual economic growth rate to 1.1% in March, down from an upwardly revised 1.6% in December.
Excluding the pandemic period, this marks the slowest annual economic growth rate since the early-1990s recession.
Central Banks Slash Rates
The European Central Bank (ECB) and the Bank of Canada both slashed official interest rates this week by 25 basis points, becoming the first G7 economies to do so in the current cycle.Despite European wage growth data continuing to tick higher, inflation in Europe has fallen sharply while economic growth has been sluggish, giving European rate-setters the confidence to commence monetary easing.
In Canada, the first-quarter GDP growth came in at 1.7% which was far below consensus expectations for 2.2%, while inflation has also eased significantly.
The decision by both central banks further solidifies the view that interest rates may have peaked for this cycle.
For investors who subscribe to this view, allocating to fixed-income securities with longer-dated maturities can help to insulate portfolios from the prospect of reinvestment risk, where the returns available from short-term investment options will start to dissipate more quickly.
The Australian Bond Exchange has an array of fixed-income securities available with maturities varying between two to five years.
Final Thoughts
While Governor Bullock continues to talk a tough game on inflation and raised the prospect of further hikes, the modest growth rate underscores a softening economic environment.
This will undoubtedly factor into the RBA’s decision making and specifically, whether higher than desired inflation warrants further tightening, which would further dampen the economy.
Internationally, it’s clear that interest rates are beginning to move lower which is broadly constructive for fixed-income investors given bonds and other fixed-income asset prices move higher as rates fall.
Corporate bonds and fixed-income securities can work to balance and diversify risk within investment portfolios, and the Australian Bond Exchange has a variety of these investments available.
If you or your financial adviser wishes to diversify your investment portfolio by adding one or more investments in a fixed income security, call the Australian Bond Exchange sales team today.
Week Ahead
- Australian business confidence
- U.S. inflation data
- Federal Reserve interest rate decision
- Bank of Japan interest rate decision
- UK GDP figures
*Data accurate as at 31.05.2024
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