Narrowly favouring a March RBA rate hike
We narrowly favour a rate hike in March .with scenario work suggesting the cash rate could reach 4¼-4¾% on persistent inflation.
Add us as a preferred Google source
Governor Bullock spoke this morning on the economy, switching from recommending last week that markets be “patient” on monetary policy to stating that “every [policy] meeting was live”.
The RBA board next meets on 16-17 March, skips April, and meets again on 4-5 May, ahead of the Commonwealth budget on 12 May.
Barring a surprise result for Q4 GDP, CCI had thought that the RBA would raise rates again in March with more to come as outline below, given high inflation and low unemployment. However, the governor’s repeated use of the word “patient” had suggested that she wanted to wait until the May meeting, after the release of the Q1 CPI in late April.
The governor’s messaging has changed – perhaps reflecting feedback from the board – and we narrowly favour the RBA raising rates again this month, or, failing that, a number of policymakers voting to raise rates.
Asked whether the RBA had overachieved on its employment objective, something that stands out internationally, in that Australia is the only advanced economy where the unemployment rate is below the estimated NAIRU, the governor again defended cutting rates last year, stating that the board responds to changing circumstances.
However, this explanation is only part of the story as Deputy Governor Hauser has said that the board had been actively testing for a lower NAIRU via lower interest rates, as it overrode higher staff estimates of the NAIRU. This approach mimicked an earlier Fed strategy for dealing with uncertainty around calculating full employment, and naturally ran the risk of higher inflation.
With the RBA recently revising up its average estimate of the neutral cash rate from 3.1% to 3.6%, the current cash rate of 3.85% does not represent particularly tight monetary policy. There is also excess demand in the labour market in that the smoothed unemployment rate of 4.2% is below both the board’s recently raised assumption for the NAIRU of 4.6% and the staff’s higher average estimate of 4.9%.
CCI's scenario work using simple policy rules based on these estimates and the RBA’s economic outlook suggests that persistent inflation would likely see the RBA raise the cash rate to between 4¼% and 4¾%, although there is always the possibility that it may raise rates by less than this and opt to keep rates steady for longer.
As for the higher exchange rate, the governor did not seem to think that it could do the RBA’s job for it on inflation, as she said that its recent appreciation reflected market expectations of higher interest rates.
On the unfolding Middle East crisis, Governor Bullock was concerned about the risk of sustained high energy prices leading to higher inflation expectations at a time when actual inflation was still high, even though an energy shock would eventually be a negative for economic activity.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
........
Investment Disclaimer
Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).
Forward-Looking Disclaimer
This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
4 topics
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Comments
Comments
Sign In or Join Free to comment
most popular
Equities
AI is changing where value accrues. Most investors haven't noticed
Swell Asset Management
