The Reserve Bank of Australia (RBA) Board increased the cash rate by 0.25% to 2.60% at its October meeting.
The RBA maintained that global factors explain much of the inflation impact locally, but that strong domestic demand is playing its role as our economy struggles to meet this demand. The Bank believes CPI inflation will be around 7.75% over 2022, before falling to a little above 4% over 2023 and around 3% over 2024. The Board will continue to pay close attention to both labour costs and the price-setting behaviour of firms for the period ahead in light of these inflation forecasts.
Outside of that, the Board is focused on:
The slowdown in rate rises gives the RBA added flexibility to potentially elongate their rate hiking cycle and/or add some pauses to their rate hiking cycle in the period ahead, if they prefer to wait for more data to come through. In saying that, if they proceed with two more hikes to round out the calendar year, this will take the cash rate to a little over 3% which might be restrictive enough depending on prevailing economic conditions. If this turns out to be correct, the critical question then becomes, how long rates need to remain at these restrictive levels to bring inflation closer to the RBA’s comfort levels.
Post the announcement, Australian government bond yields fell (prices higher), AUD/USD bounced before falling away again, and Australian equities were higher, with their best day in 2 years.
As we have reached the end of another financial year, we wanted to send a reminder about income distributions.
The Australian equity market (as measured by the S&P/ASX 200) started the year off much like the previous finished, although most of the steam had been taken out of the rally with January producing a solid +1.20% return. February was much more muted with the uncertainty of an imminent reporting season hanging over the market however with better-than-expected results, coupled with softer-than-expected domestic inflation data, March provided some highlights as Australian shares hit new record highs. The quarter ended on a high with March producing +3.27% closing the quarter off with an attractive +5.53%.
The Australian equity market (as measured by the S&P/ASX 200) started the December quarter the same way the September quarter ended, with a sea of red as stubbornly high inflation and rising bond yields placed pressure on current and forward-looking company earnings. November and December came roaring back as positive inflation data (i.e. lower inflation numbers) and sudden falls in bond yields created an air of optimism and the potential end of central bank tightening. The share market closed at near record highs.