Franklin Templeton favours Australia bonds, bets RBA on hold

[SYDNEY] Australia's central bank will likely keep interest rates at record lows in 2018 as inflation remains under control - giving investors reason to hold the nation's bonds, according to Franklin Templeton Investments.

That's the forecast of John Beck, a London-based director of fixed income at Franklin Templeton, who reckons the Reserve Bank of Australia won't raise the cash rate from its current 1.5 per cent. In contrast, the money manager expects at least three rate increases by the Federal Reserve in 2018.

"The RBA is going to be slower to raise rates than other economies - the US in particular," Beck said in a telephone interview during a trip to Sydney. "We prefer Aussie bonds over US bonds."

Mr Beck's view on the RBA is in contrast to swap traders who are pricing in about a 60 per cent chance the central bank would hike rates in December.

RBA Governor Philip Lowe said last week that he doesn't yet see "a strong case" for a near-term interest-rate adjustment. He did say he expects progress on reducing Australia's jobless rate and moving inflation to the mid-point of its 2 per cent to 3 per cent target.

If that happens, "at some point it will be appropriate for interest rates in Australia to also start moving up," he said.

Franklin Templeton's investment strategies haven't changed course despite the recent volatility that spooked equities markets from the US to China, Mr Beck said.

On his views for where the Australian dollar will trade this year, Mr Beck sees the Aussie's current level of 78.6 US cents at the "upper end of the band" for 2018.

"I'm not sure we'll see the Aussie significantly above 80 US cents," he added.

BLOOMBERG