Australian Bond Exchange Weekly Update
21st June 2024
Key points
- RBA holds rates steady again
- World-leading deficits
- UK inflation returns to target
- Bank of England holds, but signals rate cuts coming
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 May is 3.3%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 2.0% in the year to May.
- The European Central Bank Cash Rate (deposit facility) is 4.0%pa, to fight an annual inflation rate of 2.6% in the year to May.
RBA Holds Rates Steady Again
The Reserve Bank of Australia held the official cash rate steady again at 4.35%pa for the seventh month in a row as it continues to take a cautious and data-dependent approach.
While Governor Michele Bullock said the Board had contemplated lifting the cash rate, she also stated that the chances of another rate rise had not increased.
Inflation has eased significantly from its peak of 7.8% in 2022, but the pace of moderation has been slowing.
“We need a lot to go our way if we’re going to bring inflation back down” to the bank’s target range of 2 to 3 per cent.”
Michelle Bullock, Governor, Reserve Bank of Australia
The latest interest rate decision comes amid the release of federal and state government budgets, labelled by many as inflationary due to energy rebates, tax cuts and infrastructure spending.
According to ratings agency S&P, the big-spending budgets are some of the largest in the developed world and have set state debt on course to triple by 2028, relative to pre-pandemic levels.
While most economists currently expect a rate cut to be the next move, some believe we could see 2 further hikes.
Whether we see further tightening or not, it’s clear that rates will remain elevated for the foreseeable future, underscoring the attractiveness of fixed-income to deliver stable and consistent returns.
Bank of England Holds as UK Inflation Returns to Target
The inflation rate in the United Kingdom has returned to its 2% target for the first time since 2021, but it wasn’t enough to galvanise the Bank of England into slashing rates.
Inflation has fallen rapidly from a 41-year high of 11.1% in October 2022, however, several measures including services inflation and wage price growth indicate that plenty of excess demand remains.
With both the Bank of Canada and the European Central Bank cutting official interest rates earlier this month, the Bank of England is largely expected to be the next major economy to do so.
French Election Uncertainty Pushes Rates Higher
French government bond yields have spiked following President Emmanuel Macron’s snap decision to call early legislative elections.
Political uncertainty is running high in France as Marine Le Pen’s National Rally Party leads in the polls. If successful in forming government, National Rally could implement a raft of touted stimulatory policies, including tax cuts and increased fiscal spending.
2024 will see over 50 countries head to the polls; last week we saw an upending of the status quo in the European parliamentary elections, and looking ahead, the U.S. presidential election campaign is just starting to ramp up, where the stakes are materially higher.
Final Thoughts
As demonstrated by the volatility in French government bond yields, political uncertainty can have significant implications for financial markets, underscoring the need for stable investments within a well-diversified portfolio.
Fixed-income securities can play a unique role in this regard, offering investors with a consistent income stream with reduced volatility.
For more information about our available fixed-income securities, contact the Australian Bond Exchange today.
Week Ahead
- Australia monthly CPI indicator
- Australia consumer confidence
- US. GDP growth rate
*Data accurate as at 21.06.2024
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