Earlier interest rate move ‘cannot be ruled out’

19 July 2021
| By Laura Dew |
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As the Reserve Bank of Australia (RBA) vows to hold off extending bond yields beyond 0.10% after April 2024, any changes to cash rate will be data dependent.

At its July meeting, the central bank said it would not be extending yield curve control measures beyond April 2024.

But Stephen Cooper, head of Australian and New Zealand fixed income at First Sentier Investors, said an earlier move could not be ruled out, however, as it would depend on data.

The in yields had mostly been driven by offshore developments as many believed the recent high US inflation was transitory rather than permanent combined with speculation that the US Federal Reserve would look to move on rates earlier than expected.

Cooper said: “While the RBA’s central forecasts still do not see conditions suitable for a tightening until that time, the strong performance so far means that the risks around the outlook have shifted and an earlier move can’t be ruled out. Importantly, they are willing to take action on rates earlier should they need to, but that is not their current expectation”.

This meant investors should be focused on the short duration side of their bond exposure and being overweight credit.

“Given the outlook, we are focusing more on the short duration side. We are comfortable that central bank policies will be supportive of risk assets, and until any cracks start appearing in equity markets, we are happy to be overweight credit but with a short-duration bias. We will look to further reduce duration if momentum turns and yields start to track higher again,” he said.

“As further progress is made on the labour market and inflation front, shorter-dated yields will move to price in rate hikes – with these likely to pre-date any change by the RBA by quite some time.   

“We have already seen some steps in this direction with shorter duration yields drifting higher over recent months. However, we would question how much farther they can go given local inflation outcomes and the strength of the RBA’s rhetoric.” 

 

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