Asset Allocation Strategy
The RBA, The Fed and the Outlook for Interest Rates
Mon 8th November, 2021

The Reserve Bank of Australia (RBA) maintained its cash rate at 0.1% and left the $4bn per week pace of asset purchases (QE) unchanged (until February) following its monthly monetary policy meeting last Tuesday.

The RBA did announce that it is abandoning the 0.1% yield target for short-duration bonds (to April 2024). The decision to drop its yield curve control policy comes after it did not intervene to defend the target the previous week when 2-3-year bond yields surged following the recent stronger than expected Australian CPI release. A faster “improvement” in inflation and volatility in market pricing were cited as key factors behind the decision. The RBA Governor also flagged it was unlikely the yield target would be used in the future.

The RBA also dropped its guidance for no increase in the cash rate until 2024. Cash rate guidance was shifted to be more “data-based”, with an emphasis on core inflation “sustainably” reaching the mid-point of the target band (2.5%) alongside wage growth picking up to 3%. In this respect, the RBA remains resolutely dovish, expecting these conditions will not be met until the end of 2023.

At the RBA Governor’s post-meeting press conference he continued to push back against current market pricing, which has moderated a little but still implies (just over) three rate hikes in 2022, beginning mid-2022.

So, while the RBA has conceded some ground, it continues to emphasise patience. The RBA is monitoring inflation, wage growth and the unemployment rate to determine the date to begin lifting the cash rate. Unpacking the outlook for inflation and interest rates we address:

  • RBA inflation forecasts upgrade marginally
  • RBA relatively dovish in a global context
  • Fed holds the keys to global rate pulse
  • Very early days in the great policy unwind
  • House prices, household debt and the neutral policy rate debate
  • The risks for risk assets

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Written by

David Cassidy , Head of Investment Strategy

David is one of Australia’s leading investment strategists.

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