The Cut
Height Capital’s weekly update
This week we continue to unpack the RBA’s persistent rate increases and celebrate some small wins for term deposits in a more condensed version of The Cut. Later this week we look forward to sharing with you our first quarterly editorial newsletter, From Great Heights.
Cash rate increases
One of the primary news flow items last week for Australian markets, as we predicted, was the Reserve Bank’s decision to raise the Cash Rate to 4.10%. Following the announcement, Governor Philip Lowe delivered a very hawkish speech at a Morgan Stanley investment conference. Lowe acknowledged that inflation peaked late last year at 7.8% and that the higher-than-expected April 6.8% figure, had not changed their assessment that inflation is trending lower. It illustrated our Investment Committee view that sticky inflation is here to stay.
However, Lowe also commented on high services price inflation, rents, and the further large increases in electricity prices this year, but his primary concern was focused on higher unit labor costs (the amount of labour cost per unit of output).
Lowe highlighted that recent information suggests a greater upside risk to the Bank’s inflation outlook and that they have a limit to how long inflation can stay above their target band of 2% – 3%.
This speech sent banks to revise their forecasts of the terminal rate upwards, with CBA flagging the possible risk of cash rate hikes in both July and August, which would result in a peak of 4.60%. Some economists now have a peak estimate of 4.8%, which is consistent with what was required to bring down inflation in internal RBA research recently released under Freedom of Information laws.
Term deposits
On the flip side of mortgage stress to homeowners and increased cost of doing business for companies that are borrowing money, Term Deposit rates are on the rise. Less than 2 weeks ago, rates for 3- and 6-month Term Deposits were at 4.40% with Macquarie, and today we are looking at 4.60% for 3 months and 4.75% for 6 months. These rates don’t reflect the RBA increase from last week yet, as banks are always slower to pass on rate rises to savers, as opposed to borrowers who sometimes experience rate increases mere hours after RBA announcements. Deposit takers seem to think that Term rates will get very close to 5% soon, with major banks predicting at least one more rate rise from Australia’s central bank.
Select Macquarie Term Deposit Rates as at 9th June 2023
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