Kellie Wood
Key Points:
- We have been positioning ourselves for a turn in the RBA policy cycle for some time, being long Australian rates vs US rates.
- Our RBA policy model is suggesting 90bps of cuts this year. Pre-emptive easing will ensure a soft landing for the Australian economy.
- Australian bonds are primed for further outperformance vs global bonds. Across both government and credit assets we remain overweight Australia v global.
RBA delivers an expected cut
Having lagged the global policy easing cycle, the RBA today has delivered its first rate cut, after holding cash rate steady at 4.35% since Nov-2023. Demand in the private sectors have been soft, and inflation is now on a clear downward trajectory.
Inflation headed in the right direction
With a much softer Q4 inflation print, where the RBA trimmed mean printed at +0.5% qoq (vs. 0.7% projected), and 3.2% yoy (vs. 3.4% projected), this increases the likelihood that we will see core inflation back within the 2-3% target band in Q1-25, which is earlier than initially anticipated by the RBA.
Expect another two cuts in 2025
We expect another two cuts in 2025, but the pace of easing will be gradual. As the RBA has mentioned numerous times, monetary policy is a blunt tool, and calibrating the right policy setting remains a difficult task, especially when:
- Labour market has remained tight, and the unemployment rate of 4% is well below pre-COVID levels.
- While private demand was the main drag to growth, there are early signs that tax cuts and subsidies are leading to a recovery in retail sales and household spending.
- Consumer and business confidence have both improved more recently.
- Public demand will remain strong, especially in an election year for the Federal government.
- Increasing uncertainty around tariffs and global trade war, which typically leads to higher inflation and lower growth.
Long-dated Aussie rates is how we’re playing the cuts
2025 is the year Australian bonds outperform Global bonds – the RBA is embarking on an easing path and valuations are very attractive. As of today, the market is pricing in 55bps of easing over the year, which we believe is a fair assessment. We remain long Australian bonds across our fixed income portfolios, preferring to own the back-end of curve, which provides protection against a global growth slowdown, especially when the Australian bond curve is steep relative to our counterparts.
By Kellie Wood, head of fixed income