Interest rates on the move? Don't be too concerned...
The drumbeat of central banks heading towards the exits from ultra-easy monetary policy is getting louder. It started with the Bank of Canada, then the Bank of England followed by the RBNZ and the Bank of Korea. Russia and Brazil have raised rates. The US Federal Reserve is starting to “talk about talking about tapering” (or slowing) its bond buying, and Fed officials are signalling the start of rate hikes in 2023 via the so-called “dot plot” of the median Fed official’s interest rate expectations.
While Fed Chair Powell played down the importance of thedots, it was still too big a move to ignore. Our view is that formal taper talk is likely to start at next month’s Fed meeting with actual tapering likely to start late this year or early next and that 2023 for the first Fed hike is a reasonable expectation.
In Australia, the RBA is also slowly heading towards the exit of easy money with: 0.1% funding for banks ending this month; the bond targeted for its 0.1% bond yield target up for review in July and likely to see the target slip below 3 years; its bond buying program also up for review in July and also likely to be reduced or reviewed more frequently; and a speech by
Governor Lowe dropping a reference to the conditions for a rate hike as being “unlikely to be met until 2024 at the earliest.” For several months now we have been anticipating that the first RBA rate hike would come in 2023, and after the strong jobs data for May this seems to be becoming consensus. In fact, it’s possible (covid permitting) that the conditions for higher rates (wages growth of 3% or more and inflation sustainably in the 2- 3% target) may fall into place by late next year enabling a rate hike at the same time, although our base case remains 2023.
The hawkish shift by central banks – notably since the Fed last week – has caused some wobbles in investment markets. Some are fearing the Fed and other central banks may not be as committed to sustainably achieving their 2% or so inflation targets as previously thought and that the hawkish Fed tilt will threaten the recovery. So, should investors be concerned?