Global investment manager T. Rowe Price has echoed predictions that the Reserve Bank will keep interest rates on hold and said that the central bank would need to address its inflation forecast misses in today’s meeting.
Last week, the Australian Bureau of Statistics reported that underlying annual inflation rose from 2.1 per cent in the October quarter to 2.6 per cent in the December quarter.
However, the latest forecasts from the RBA in November last year said that underlying inflation would only reach 2.25 per cent and would remain at that level until mid-2023.
“They are going to have [to] atone for some of their forecasting missteps on the inflation side,” said T. Rowe Price associate portfolio manager Scott Solomon.
“They've backed themselves into a corner with the resoluteness of their forecasts and need to make an effort to reassert their credibility. Luckily the bond market was able to see through this and has brought rate forecasts well ahead of RBA estimates.”
Mr Solomon said that he hoped this would help to avoid issues that arose late last year when the RBA abandoned yield curve control.
“That said, I don't expect the RBA to completely wave the white flag – I believe there will still be hints of patience and they will focus on preparing the markets for hikes after the May elections,” he said.
Additionally, the RBA could be set to end its asset purchases “sooner rather than later” according to Mr Solomon, potentially with immediate effect out of today’s meeting.
He also flagged tomorrow’s National Press Club appearance by RBA governor Dr Philip Lowe as being important to monitor.
“What I'm listening for are hints of what the RBA plans to do with the A$350 billion in bonds on their balance sheet once the asset purchase program ends,” said Mr Solomon.
“The term "balance sheet" was mentioned 28 times in the minutes from the Fed's December meeting so I expect RBA members to shed light on this. Balance sheet run-off will be new territory for the RBA and it's imperative the process is thoughtful and isn't fumbled.”
A recent survey of Australian investors found that 36 per cent believed inflation posed the biggest external risk.
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.
