Australia’s second-largest pension fund says RBA will not hike rates in August
This comes after the monthly consumer price indicator exceeds economists’ estimates
AUSTRALIAN Retirement Trust (ART), the country’s second-largest pension fund, said money markets are mistaken in betting that the Reserve Bank of Australia (RBA) will resume raising interest rates at its next policy meeting.
The comments follow hotter-than-expected inflation this week that prompted traders to increase wagers that the RBA will hike at its next meeting, which is slated for Aug 5 to 6.
The monthly consumer price indicator accelerated to an annual 4 per cent in May, exceeding economists’ estimate of 3.8 percent.
Traders are pricing a 50-50 chance the RBA will boost borrowing costs in August and have pushed back the timing of any future easing to the end of next year.
“We don’t think they’re going to raise rates in August,” Andrew Fisher, head of investment strategy at ART, said on Thursday (Jun 27).
“From the RBA’s perspective, I think they’d be quite happy for markets to be still thinking the next move is a potential rate rise because they don’t want complacency creeping in,” he added.
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Fisher also noted that the pension fund’s base case is that “rates don’t move for another 12 months and the next move is down”.
The quarterly consumer price index, out on Jul 31, would be more significant in determining the central bank’s path forward, he explained.
The RBA has raised its cash rate 13 times since May 2022 to about 4.4 per cent as it tries to bring inflation back under control. That is less than many global counterparts – about one percentage point below the US – and may be one of the reasons inflation is proving sticky.
Australian policymakers have taken a more cautious approach to tightening as they try to preserve post-pandemic job gains. As a result, the central bank only forecasts inflation will fall back within its 2 to 3 per cent target in late 2025.
Still, governor Michele Bullock said the board is not ruling anything in or out on policy, which has been interpreted as a willingness to hike again, if needed.
“The moderation in inflation in Australia is coming a little bit slower and is a little bit behind the rest of the world,” Fisher said, adding that “there’s going to be bumps along the way, but the trend is still very much in the right direction”.
The ART still expects a soft economic landing in Australia and globally.
“The landing here will be delayed and we’ll probably one of the last major developed markets to cut rates, but that’s probably reasonable given we didn’t raise them anywhere near as far,” Fisher noted.
Fisher noted that the ART, with A$285 billion (S$257.8 billion) under management, has “elevated diversification in both directions”.
The head of investment strategy added that sovereign government bonds were about 3 per cent overweight from the fund’s benchmark allocation.
He noted that the ART saw more opportunities in unlisted markets, including private credit and industrial property.
Australia’s A$3.9 trillion pension industry – known locally as superannuation – is expected to finish the financial year with returns greater than 9 per cent, according to an estimate by research firm Chant West.
The ART’s growth investment option is expected to return 11 to 11.5 per cent for the financial year when numbers are finalised over the weekend, while the balanced option – where the bulk of members keep their retirement savings – is tipped to return just under 10 per cent.
Earlier this week, the ART confirmed it was shifting the default option for its younger members to a higher growth fund from the traditional balanced option as it chases higher returns. BLOOMBERG
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