Franklin Templeton Australia has deemed the interest rate expectations of the local financial market too aggressive in the firm’s latest outlook for inflation and monetary policy.
While the market has priced in a peak of above 3 per cent during the current monetary policy tightening cycle, Franklin Templeton argued that a more measured approach from the Reserve Bank (RBA) was to be expected with rates reaching a high of around 1.5 per cent.
“It could be slightly higher, but it is almost certainly not going to the level currently priced by the market,” predicted Franklin Templeton fixed income director Andrew Canobi.
“With household debt levels at record highs and consumer confidence already weak, a cash rate as implied by current markets would likely push Australia into a housing-led recession.”
The true path of interest rates will also be critical for investors, Mr Canobi said, as the RBA’s decisions will be the most significant driver for bond market returns in the coming year.
If future rate hikes occur as the market currently expects, Franklin Templeton indicated that it would be the most aggressive tightening cycle since 1990.
“Rising prices of non-discretionary items, such as food and energy, are de facto tightening and are doing some of the RBA’s work for it in curbing demand,” noted Mr Canobi.
“Just as inflation is a lagging indicator, changes in monetary policy work with lags that will show up over coming months and quarters. The difficulty is central banks must respond to the here and now, and Australia’s annual headline CPI of 5.1 per cent cannot be dismissed easily.”
ANZ has now predicted that the central bank will deliver a hike of 40 basis points on Tuesday due to a sharp acceleration in average hourly wages, and economists have predicted rates will continue to rise to at least 1.75 per cent by the end of next year.
“The monetary action being taken right now will manifest itself in significantly weaker growth over the coming 12 months. The extent of monetary policy will be a determining factor,” Mr Canobi concluded.
“The tide is turning, and we are working through the excessive fiscal and monetary stimulus of the past two years.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
