Australian Bond Exchange Weekly Update
21st February 2025
Key points
- RBA cuts cash rate to 4.10% but warns against premature easing.
- Australia’s economy shows signs of recovery with a 2.5-year high in leading indicators.
- Europe faces rising energy costs as wind generation drops, driving up gas prices.
- India considers higher deposit insurance, potentially boosting bond market confidence.
Global Cash Rates & Inflation
- Australia: The Reserve Bank of Australia (RBA) Cash Rate was decreased by 0.25% to 4.10% per annum, with annual inflation at 2.4% (trimmed mean 3.2%) for the December quarter.
- United States: The Federal Reserve’s cash rate is currently between 4.25%–4.50% per annum, with annual inflation at 3.0% as of January.
- United Kingdom: The Bank of England reduced the Bank Rate to 4.50% per annum to manage an inflation rate of 2.5% in the year to December.
- Europe: The European Central Bank (ECB) deposit facility rate is 2.75% per annum, with inflation at 2.4% over the same period.
RBA Cuts Cash Rate by 25bps to 4.10%
As expected, the RBA lowered the cash rate by 25 basis points to 4.10%. The decision was driven by a faster-than-expected decline in inflation, bringing underlying inflation closer to the RBA’s 2–3% target range over the second half of 2024.
Despite the rate cut, the RBA emphasised that monetary policy remains restrictive. It acknowledged progress in reducing inflation but warned of the risks of easing too quickly, which could stall disinflation and cause inflation to stabilise above the midpoint of the target range. The Board also noted that the labour market remains tight, which could contribute to inflationary pressures in the future.
Following the announcement, 5- and 10-year Australian government bond yields rose, further normalising the yield curve. Over the past three months, the benchmark 10-year Australian government bond yield has been fluctuating between 4.40% and 4.70%.
ABE Expands Global Reach with ViewTrade Australia
We’re thrilled to announce a new partnership with ViewTrade Australia, extending ABE’s reach to global investors. This agreement will give ViewTrade’s clients direct access to ABE’s bond marketplace and OTC securities, enhancing portfolio diversification. With ViewTrade’s global presence and seamless technology integration, ABE continues to broaden investor access to Australian and international fixed-income markets.
Westpac-Melbourne Institute Leading Index Shows Economy Gaining Traction
The Westpac-Melbourne Institute Leading Index, which measures the likely pace of economic activity three to nine months ahead, recorded an annualised growth rate of 0.58% in January, up from 0.24% in December. This marks a 2.5-year high, indicating that the Australian economy is gaining momentum.
Key Takeaways:
• The increase in the index suggests improving economic conditions and could signal stronger business investment and consumer confidence in the coming months.
• The RBA’s decision to cut rates, combined with improving economic indicators, reinforces a cautiously optimistic outlook. However, sustained growth will depend on continued inflation control and labour market trends.
• Historically, such a rise in the index has been associated with higher corporate earnings and stronger financial market performance, though this depends on other macroeconomic factors.
The RBA’s recent hawkish stance, despite the rate cut, aligns with these figures, as stronger-than-expected economic conditions may limit the scope for further monetary easing in the near term.
Europe’s Energy Troubles Continue
Europe’s wind generation recorded a 16% year-over-year decline, leading to an unexpected increase in natural gas demand. This shortfall has contributed to a tightening of natural gas inventories, raising concerns over energy security and price stability.
Europe’s TTF natural gas benchmark had risen to €59 per MWh ($19.50 per mmBtu)—the highest level since February 2023. This marks the fourth consecutive week of price increases in early 2025. If wind generation remains inconsistent, reliance on alternative energy sources, including natural gas, could persist, further impacting energy prices and inflation across the region.
Higher Deposit Insurance Could Strengthen Indian Bonds
India is considering raising the deposit insurance limit from ₹500,000 (approximately $6,000) to ₹1,000,000 (approximately $12,000), a move that could enhance confidence in the banking sector and reduce systemic risk during periods of financial instability.
With the current insurance limit in most countries around $100,000, India’s proposed 20% increase would align the country’s financial safety net with global standards, potentially boosting investor confidence in Indian bonds, particularly those issued by banks. This move could encourage greater participation from retail investors, improving liquidity and stabilizing the financial system, but the final decision will depend on legislative developments and broader economic factors. Investors should keep an eye on these changes as they may influence the outlook for India’s bond markets.
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Final Thoughts
This week’s market developments underscore the delicate balance central banks must maintain between economic growth and inflation control. With the RBA’s latest rate cut, growing optimism in economic indicators, and ongoing energy market disruptions, investors should keep a close eye on global trends to navigate the evolving financial landscape.
Stay tuned for next week’s update as we track the latest developments in financial markets.
*Data accurate as at 21.02.2025
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