Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 22nd March

Key points 

  • RBA holds rates again at 4.35%pa as hawkish language softens
  • Federal Reserve holds despite higher inflation
  • Bank of Japan ends negative rate regime

Global Cash Rates & Inflation 

RBA Holds Rates Again at 4.35 %pa as hawkish language softens 

The Reserve Bank of Australia held the official cash rate once again at 4.35%pa, although the language included in its post-meeting statement was less hawkish compared to previous statements  

In February, the RBA stated that “a further increase in interest rates cannot be ruled out” while the latest statement said that “the Board is not ruling anything in or out.”  

It is widely anticipated that a rate-cutting cycle could commence in September of this year, although this is data-dependent, and any surprises could see projections pushed further out.   

Nonetheless, the subtle yet significant shift provides insight into the central bank’s latest thinking, highlighting a more doveish approach as inflation continues to ease.  

While rate cuts aren’t necessarily imminent, the change in language can be perceived as an indication that they’re nearing. 

“Recent [inflation] data suggests that we’re on the right track, but the interest rate path that best ensures that we bring inflation back to target remains uncertain”. 

RBA Governor, Michelle Bullock 

In other comments, Governor Bullock stated the Bank did not believe that monetary and fiscal policies were working against each other despite growing criticism from some pundits over the Federal Government’s ongoing industrial relations reforms. 

Just last week, the Fair Work Commission greenlighted pay rises of up to 14% for 250,000 aged care workers and up to 7% for another 80,000 indirect care workers. 

The concern is that ongoing wage increases will continue to fuel higher inflation, which could ultimately see early rate cut expectations fade. 

The Australian Wage Price Index increased to 4.2% in December and has been climbing sharply since December 2020. 

Federal Reserve Holds Despite Higher Inflation  

The U.S. central bank held the Federal Funds Rate steady between 5.25% – 5.5%pa and despite inflation coming in higher than expected, reiterated that rate cuts were still expected this year.  

Annual inflation in the U.S. unexpectedly increased to 3.2% in February from 3.1%, and core inflation fell less than anticipated to 3.8%, suggesting that the so-called ‘last mile’ of getting inflation back to target could prove to be difficult.  

Despite this, Jerome Powell stated that the recent higher-than-expected inflation data had not changed the underlying story of easing price pressures.  

The latest projections in December indicated three quarter-point rate cuts by the end of 2024. 

Bank of Japan Ends Negative Rate Regime 

For the first time since 2007, the Bank of Japan (BoJ) has hiked its target policy rate, increasing it from -0.10%pa to 0%pa.  

As we mentioned in last week’s newsletter, the implication for both domestic and international fixed-income markets is that increasing Japanese rates could see a repatriation of foreign investment capital back to Japan. 

Japanese investors have approximately U.S.$4 trillion in overseas investments and by some estimates, own up to 15% of all Australian government and semi-government bonds. 

In such a scenario, Japanese investors would sell down their foreign bond holdings, pushing global yields higher and ultimately impacting the demand for local bonds and the returns available.  

Final Thoughts 

While U.S. and Australian central bankers continue to proceed with caution, recent comments from both Bullock and Powell suggest that rate-setters are still committed to cutting interest rates, despite inflation remaining higher than anticipated. 

As such, fixed-income investors should consider whether their portfolios are appropriately positioned before the commencement of an eventual rate cutting cycle. 

Week Ahead 

  • Westpac consumer confidence  
  • U.S. GDP data  
  • Bank of Japan monetary policy meeting minutes  
  • Monthly CPI indicator  

*Data accurate as at 22.03.2024

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