Franklin Templeton: Australian interest rate expectations are too aggressive

  • By Zilla Efrat

The Australian financial market’s interest rate expectations of a cash rate peak of more than 3 per cent in the current monetary policy tightening cycle are too aggressive, according to investment manager Franklin Templeton Australia.

In its latest review of the outlook for inflation and monetary policy, Franklin Templeton’s team that looks after the Franklin Australian Absolute Return Bond Fund, is sticking with its view that the Reserve Bank of Australia (RBA) should take a measured approach to raising the cash rate and could possibly end up with a high for the cycle 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,” says Andrew Canobi, a director of Franklin Templeton Fixed Income.

Around 125 of the world’s central banks have tightened monetary policy, producing conditions that are the most restrictive since the GFC.

Current local market pricing is projecting the most aggressive tightening cycle since 1990 – significantly higher than the last four rate hike cycles.

But Canobi says: “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.

“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.

“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.

“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.”

“The tide is turning, and we are working through the excessive fiscal and monetary stimulus of the past two years.”