4 November 2022
- RBA hikes rate for the seventh time
- Strong inflationary psychology concerns
- Fed announces 75 basis points increase
- Selloff in China’s debt markets
- Current investment opportunities
The Reserve Bank of Australia (RBA) lifted the cash rate by 25 basis points to 2.85% on Tuesday. It is the seventh rate rise to hit Australian borrowers to quell the country’s strongest inflation in 32 years. The result was widely predicted by the market and analysts, with the RBA deciding to continue the 25-basis point path despite a significant lift in the inflation forecast for 2023 from 4.3% to 4.75%.
Last week, the Australian Bureau of Statistics (ABS) reported the consumer price index (CPI) rose 1.8 per cent in the September quarter to an annual rate of 7.3 per cent, the steepest annual rise in three decades.
During this period of rising inflation, what is most concerning is a strong inflationary psychology becoming entrenched in the Australian psyche. As this develops, businesses become more confident that they can raise their prices; consumers become more accepting of the price rises and see significant wage increases as labour market tightness persists. The Bank for International Settlements puts it in its recent annual report: when inflation is high, it becomes a coordinating mechanism for pricing decisions.
Overall, inflation will remain elevated and poses further pressures on inflation psychology after the Budget papers raised the prospect of a 50% or more increase in electricity prices over 2022 and 2023. Weak business sentiment and the prospect of a red-hot labour market has also added to the inflationary pressures.
The “Federal Reserve” (FED) has announced its fourth consecutive 75 basis points increase to control inflation. In the “Federal Open Market Committee” (FOMC) statement, two points were added, one to highlight the need for contractionary policy for an extended period to remove inflation risks, and another to recognise that the full effect of the tightening of policy takes time to filter through to the wider economy.
The FOMC’s belief that demand is still in excess of supply which leads to persistent inflation risks is expressed in the phrase “in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” This can be seen in the rising consumer prices which are growing at a multiple of the FOMC’s 2.0%yr target, and the near record lows of the unemployment rate and strong nominal wage growth.
The US stock markets rose as the Fed indicated that rate rises would start to slow down but sank as Powell confirmed that further rate rises are expected which could stay high for longer than the Fed had first indicated.
The selloff in China’s debt market is indicative of deeper economic problems and the frustrated efforts to restart the economy. This development also points to the political changes within China and leadership’s shift away from economic growth being a priority. Moreover, the selloff comes as the yuan recently dropped to its lowest level since 2008.
Current Investment Opportunities
With global tightening cycle underway, the Australian economy is emerging as a “safer haven” for bond investors to withstand the challenges of high inflation.
ABE is pleased to announce that we finally have an allocation to Under Armour Inc, after months of monitoring this position. Offering a fixed yield of 6.00% per annum until June 2026, it is a great opportunity to add a globally recognisable brand to your investment portfolio.
Contact us to find out more details.
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