Australian Bond Exchange Weekly Newsletter
Friday 24 March 2023
- The “Organisation for Economic Cooperation and Development” (OECD) growth expectation for Australia is 1.8 per cent for 2023 (AUS)
- Inflation, measured by the “Consumer Price Index” (CPI) indicator, rose by 1.9 per cent in the December quarter and 7.8 per cent over the year
- Cash rate is 3.60 per cent (AUS)
- The White House made a statement this week affirming US President Joe Biden’s confidence in Federal Reserve’s Governor Mr. Powell (US)
- The current Federal Reserve interest rate is 5 per cent (US)
- The annual inflation rate for the US is 6 per cent for the 12 months that ended in February 2023 (US)
- EU cash rate is 3.50 per cent (EU)
- Annual inflation rate was 8.5 per cent in February 2023 (EU)
- Cash rate in the UK is 4.25 per cent (UK).
Although the markets may want a rest from interest hikes, the Organisation for Economic Cooperation and Development (OECD) warned that Australia still needs increased cash interest rates to deal with inflation. The OECD has also downgraded expectations for Australia’s economic growth by 0.1 per cent to growth of 1.8 per cent in 2023 and 1.5 per cent in 2024. Inflation, measured by the “Consumer Price Index” (CPI) indicator, rose by 1.9 per cent in the December quarter and 7.8 per cent over the year. Meanwhile, Australia’s cash rate is 3.60%. In our opinion, if inflation and cash rates keep rising as expected while economic growth is slow, we could be catching glimpses of a recession ahead.
United States (US)
We have seen two bank failures this month in the United States that have raised questions about the health of the financial system in the US, so the financial world was watching the Fed’s decision around interest rates closely. Although some have said that the Fed should have reacted to inflation sooner, the White House made a statement this week affirming US President Joe Biden’s confidence in Federal Reserve’s Governor Mr. Powell.
The Federal Reserve announced an interest rate rise to 5 per cent. In terms of inflation, the annual rate for the US is 6 per cent for the 12 months that ended in February 2023. In our opinion, we expect that the financial markets will continue to experience volatility and company profits might decline; this might be a good moment to shift from profit to purpose.
European Union (EU)
The EU Main refinancing operations cash rate increased 0.5 percentage points to 3.50 per cent as of 22 March 2023. After the collapse of Switzerland’s second-largest bank, Credit Suisse, there are fears that the recent increase in cash rates in the EU could spark a domino effect across the financial industry. In terms of inflation, the annual inflation rate was 8.5 per cent in February 2023. Concerning, when the annual inflation was 2.9 per cent in 2021. In our opinion, the ripple effect of the Ukraine-Russia crisis in the supply chains through higher prices of wheat and petrol may lead to food insecurity worldwide, leading to social unrest. People in Australia could experience the domino effect caused by a conflict in Europe as a loss in purchase power or a supermarket cart that is less full while spending the same amount of money they did in 2019.
United Kingdom (UK)
UK Chancellor Jeremy Hunt said that the “Bank of England” (BOE) should remain focused on taming dangerously high inflation despite the strain that may cause on the global banking sector. The cash rate in the UK is currently 4.25 per cent. The decision may affect the rate paid by householders with variable-rate mortgages across the UK.
What does this mean for you?
Despite the uncertainty in the financial markets, primarily in the US and Switzerland, major Central Banks continue to increase official cash rates. In our opinion, this signals to the world that they are still committed to fighting inflation.
For us, there is a high chance that volatility will continue in the financial markets. It is a chance for you to evaluate your priorities and financial needs now and in the future. In our opinion, it is an excellent time to look at your finances and make changes if needed. There is no need to panic if you haven’t yet taken the time to make your finances a priority in your life, but there is no better time than now to prepare for the future. We view this as an excellent time to start investing, especially in defensive assets that can help weather recessions better than risk assets can. Corporate bonds can help you create a defensive strategy in your investment portfolio to assist in protecting your capital.
We are interested in hearing your thoughts, if you hold a different view of where the markets are heading, please let us know as we would love to have a discussion about it.
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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.
Copyright © 2023 Australian Bond Exchange Pty. Ltd. (ABN 73 605 038 935, AFSL 484453)
Australian Bureau of Statistics. (2023, March 01 ). Monthly CPI indicator up 7.4 per cent in the year to January. Retrieved March 22, 2023, from https://www.abs.gov.au/media-centre/media-releases/monthly-cpi-indicator-74-percent-year-january#:~:text=The%20monthly%20Consumer%20Price%20Index,Bureau%20of%20Statistics%20(ABS).
Bank of England. (2023, February 02). What are interest rates? Retrieved March 22, 2023, from https://www.bankofengland.co.uk/explainers/what-are-interest-rates#:~:text=Bank%20Rate%20is%20currently%204%25.
BBC News. (2023, March 22). The US interest-rate decision the world is watching. Retrieved March 22, 2023, from https://www.bbc.com/news/business-65017979
BBC News. (n.d.). The US interest-rate decision the world is watching. Retrieved March 22, 2023, from https://www.bbc.com/news/business-65017979
Board of Governors of the Federal Reserve System. (2023, March 21). Selected Interest Rates . United States. Retrieved March 22, 2023, from https://www.federalreserve.gov/releases/h15/
Eurostat. (2023, March 09). Annual inflation more than tripled in the EU in 2022. Retrieved March 22, 2023, from https://ec.europa.eu/eurostat/web/products-eurostat-news/w/DDN-20230309-2
Eurostat. (2023, February). Euroindicators. Retrieved March 22, 2023, from https://ec.europa.eu/eurostat/documents/2995521/16310161/2-17032023-AP-EN.pdf/abc8d4fa-c8d5-bc3e-8fd1-96bba16e1c8f#:~:text=The%20euro%20area%20annual%20inflation,%2C%20the%20rate%20was%206.2%25.
Financial Times. (2023, March 22). Jeremy Hunt insists Bank of England should keep focus on curbing inflation. Retrieved March 22, 2023, from https://www.ft.com/content/dbe5e037-6ce8-4ebf-a897-4f89d458a4f5
Office for National Statistics. (2023, February 15). Consumer price inflation, UK: January 2023. Retrieved March 22, 2023, from https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/january2023#:~:text=Image%20.csv%20.xls-,The%20Consumer%20Prices%20Index%20including%20owner%20occupiers%27%20housing%20costs%20(CPIH,of%209.6%25%20in%20October%20202
Reserve Bank of Australia. (2023, March 08). Cash Rate Target. Australia. Retrieved 03 22, 2023, from https://www.rba.gov.au/statistics/cash-rate/
The Guardian. (2023, March 17). ECB raises eurozone interest rate despite banking sector fears. Retrieved March 22, 2023, from https://www.theguardian.com/business/2023/mar/16/ecb-raises-interest-rates-despite-banking-fears-credit-suisse
The Sydney Morning Herald. (2023, March 17). Interest rates to stay high until 2024 to battle inflation. Retrieved from https://www.smh.com.au/politics/federal/interest-rates-to-stay-high-until-2024-to-battle-inflation-oecd-20230317-p5csxo.html
US Inflation Calculator. (n.d.). Current US Inflation Rates: 2000-2023. Retrieved March 22, 2023, from https://www.usinflationcalculator.com/inflation/current-inflation-rates/#:~:text=The%20annual%20inflation%20rate%20for,ET.