Yesterday, the RBA Monetary Policy Board raised interest rates by 25 basis points to 4.6%. I continue to think the risk is to the upside and that there is at least one more hike. There’s a range of views on what happens next.
There is still close to 50% probability of a follow up hike in November which feels a bit more than likely after today. Unless CPI shows some signs of cooling, it is difficult to argue against a further hike.
– Andrew Canobi, Franklin Templeton
Our cash rate model peaked at 4.75%, which suggests the RBA may have room for one more hike, but our models have now started to turn lower. The housing downturn and weaker business and consumer sentiment are starting to bite. With markets pricing a terminal rate of around 5%, we think pricing has run ahead of the fundamentals and looks too high. We believe the next meaningful move is a cut, and we expect the RBA to begin easing in 2027 as the inflation shock matures and the focus shifts to downside risks to growth.
– Kellie Wood, Schroders
In raising the official cash rate by 0.25% today, the RBA has acknowledged the global pressures that are combining with solid domestic demand to keep Australia’s inflation persistently high. The RBA has taken the view that inflation remains a bigger risk than weaker growth. Despite a flattening in household spending in August, today’s ABS Monthly Household Spending shows that Australian consumers remain remarkably resilient, with nominal spending 6.8% higher year-on-year.
-David Lane, Focus Partners Australia
…we believe rates are now at or close to their peak. Financial conditions are already restrictive, growth is softening and much of the impact from this year’s hikes has yet to fully feed through to the economy. Against that backdrop, we continue to see value in Australian duration at current yield levels, particularly as moderating inflation and slower domestic demand should create scope for policy rates to move lower next year.
– Harry Jones, Insight Investment
Before the announcement – A September hike will make another tightening step in November near unavoidable. The November meeting will include updated economic forecasts, where projections for inflation and growth are sure to be lifted over the horizon & suggest further tightening is required… On the positive, two more hikes to a policy rate of 4.85% should be restrictive enough to get the job done for the RBA.
– Malin Rosengre, RBC BlueBay Asset Management
This morning there were reports that Metrics Credit Partners has suspended withdrawals to two of its funds, the Wholesale Investment Trust and MCP Real Estate Debt Fund, after a $170m write-down by auditors earlier this week. It’s difficult to sell or redeem private loans quickly, so it’s reasonable that fund managers halt redemptions. Possible illiquidity is part of the reason investors are paid higher rates and, while freezing the funds was not expected, it is in the interest of all the remaining unitholders.
According to The Australian, further material Metrics write-downs are expected. This is bad news for the private credit market, already in shock after the Bathla administration. Metrics and Bathla operate in different subsectors. It’s important to note private credit is a very broad asset class. Last week, La Trobe Financial‘s Chris Andrews wrote two very good notes, explaining historic defaults and six questions investors need to ask providers, which may help if you want to better understand any private credit investment.
Longer-term US government bond rates continue to move higher. Laura Cooper from Nuveen explores what’s happened as rates speed past 5%p.a. Benoit Anne of MFS Investment Management expects higher for longer remains the base case, and believes the duration is likely to stay challenging.
Our lead article this week is about Australian AI funding from the RBA’s, Bradley Speed. It covers all asset classes and is well worth a read.
Pimco‘s Lotfi Karoui says that AI capital spending may be contributing to higher real rates, but there is little evidence that it’s due to AI bond issuance crowding out Treasuries.
Mark Dowding of RBC BlueBay Asset Management offers some timely market commentary.
In Australian corporate bond news:
Transgrid raised $950m in a senior and subordinated deal. Demand was strong, with bids of $3.3 billion, and Asian buyers accounted for 30% of the transaction. There was a senior and subordinated issue:
- A fixed-rate 10-year senior secured deal which raised $500m and priced at 165 basis points over semi quarterly swap or a 6.704% coupon, down 10 basis points from price guidance
- A floating-rate subordinated 30NC10, which raised $450m and priced at 180 basis points over 3-month BBSW, was a significant 20 basis points lower than price guidance
Hope you’re having a great week!
