Financial Advisors & Planners Perth I Westmount Financial I Rick Maggi

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Bond buying comes to an end...

Over the last six months several central banks have raised interest rates. This started in emerging markets but developed country central banks have also hiked rates - notably those in the UK, NZ, Norway and South Korea. Both the Fed and Bank of Canada are likely to hike in March.

And now the RBA is (slowly) getting closer to rate hikes too. Last year it ended cheap funding for banks in June, slowed its bond buying and in November ended its 0.1% yield target for the April 2024 Government bond. It has now decided to end bond buying this month and while the RBA’s commentary was less hawkish than expected – being prepared to be “patient” in waiting for more confidence that the pick up in inflation will be sustained and still wanting to see faster wages growth – its forecasts have now shifted in a more hawkish direction: it now expects unemployment to fall below 4% this year; it expects a further pick up in wages growth; and now sees underlying inflation rising to around 3.25% in coming quarters before falling back to 2.75% next year (where it was forecast to be 2.25%).

So, while the RBA was not as hawkish as expected in its post meeting statement, its revised more upbeat forecasts have moved it in a more hawkish direction to at least allow the possibility of a start to rate hikes later this year, whereas previously its forward guidance was that a rate hike was unlikely until 2024, possible in 2023 but not in 2022.

For some time we have been more hawkish than the RBA and coming into this year were expecting the first hike would occur in November, but brought that forward to August two weeks ago. And that remains our view.

more from AMP’s Dr Shane Oliver