This article was originally published on the Australian Bond Exchange as part of the ABE Weekly series
- Reserve Bank of Australia review proposes restructure, with two new boards
- BOE & RBA note rising inflation is increasing corporate and government bond yields
- Australian consumer confidence recovers despite inflation
- The inverse yield curve in US treasury bonds continues
Cash Rates & Inflation*
- The RBA Cash Rate is at 3.6% and inflation sits at 6.8%, the next RBA meeting is 2 May 2023
- The BOE Cash Rate sits at 4.5%, inflation at 10.1%, with the next meeting set for 11 May
- US Federal Reserve cash rate (policy rate) is currently at 4.83% and inflation sits at 5%, with the next review date on 3 May
- The ECB Cash Rate is at 3.5% and inflation is at 6.9%, with the next review set for 4 May
UK & Australia in Lock Step as Dual Board Announced and Minutes Released
This week, the central banks of the United Kingdom and Australia released the minutes of their recent monetary policy meetings from 8th March and 4th April respectively, with both the Bank of England’s Money Markets Committee (MMC) and the Reserve Bank of Australia (RBA) noting that rising inflation and geopolitical tensions had the potential to cause instabilities in financial markets, as inflation concerns continue to wane on Australia and globally.
Further, it seems that Australia is following in the footsteps of the Bank of England, in the creation of a dual board system to oversee governance and set interest rates, and the potential for a reduction in meetings from 12 to 8. The creation of two RBA boards, as recommended by the independent review requested by Treasurer Jim Chalmers, an RBA Fit for the Future, has led John Kehoe from the Australian Financial Review to label the move as “the biggest shake-up to the RBA since inflation targeting and formal independence was established in the 1990s.”
How have rising inflation rates impacted the bond market?
The RBA and the BOE both noted that rising inflation rates have resulted in a significant increase in government and corporate bond yields. This is music to the ears of Australian investors concerned with the increasing volatility of stocks who want to diversify their investment portfolios with fixed income streams such as bonds.
Australian Bond Exchange securities are now boasting an average coupon rate return of 6%*, suggesting that despite an increase in inflation rates putting price pressure on equity investors, this tightening of monetary policy could see bond investors benefit in the long-term.
Consumer Sentiment Increases Signalling Future Rate Hikes On The Horizon
According to the Westpac Melbourne Institute Index of Consumer Sentiment survey for April, “sentiment increased by a spectacular 9.4% to 85.8” suggesting that consumers saw the RBA’s decision to hold the cash rate at its current level as a positive sign. It’s important to note that unemployment is still sitting at the lowest rate in decades, just 3.5%, which could be another factor as to why consumer confidence has recovered.
However, as the RBA mentioned in their minutes, they would need to see a contraction in the economy to continue the pause on hiking the cash rate, suggesting future cash rate increases could be on the horizon.
US inflation drops, but still an inverse yield curve.
The US Federal Reserve cash rate (policy rate) is currently at 4.83%, to be reviewed May 3 at the next meeting, whilst inflation sits at 5% down 1% from February. The next CPI indicators that determine US inflation will be available on the 11 May.
What’s interesting to note about the US economy is the inverted yield curve (the cash rate is higher than the long-term treasury bond yield) remains.
* Accurate as at 19th April 2023.
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