Economic data
Despite easing, inflation remained persistently high at 7 percent in the March quarter, down from 7.8 percent in December. This suggests that inflation might have peaked last year, but there remains a chance of further interest rate hikes to follow the 11 increases we have seen in 12 months.
The labour market is tight with the unemployment rate hovering around a 50-year low of 3.5 percent in the face of higher interest rates.
The Reserve Bank of Australia (RBA) may need to continue raising interest rates if inflation remains persistently high. The RBA’s decision to take the official cash rate to 3.85 percent earlier this month surprised financial markets and economists.
The RBA highlighted the importance of reining in inflation as a priority to take some heat out of the labour market and to slow the economy. This suggests that further rate rises may be likely.
“While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4.5 percent in 2023 and 3 percent in mid-2025,” RBA Governor Philip Lowe said in a statement. With an inflation target of 2 to 3 percent, he said “some further tightening of monetary policy may be required”.
There are revised economic forecasts from the federal government outlined in the May budget. Some details can be found in our Budget Bulletin.
In its board meeting minutes, the RBA has said “monetary policy may need to be tightened at subsequent meetings” as it gathers more economic data, adding that the strength of the Australian banking sector is "not a consideration in the decision to pause".
This is in contrast to a banking crisis in the US that has unnerved financial markets. Most recently, First Republic Bank was acquired by JPMorgan Chase after it collapsed under the weight of higher interest rates. This followed the implosion in March of two other US banks – Silicon Valley Bank and Signature – which failed due to loans and investments that lost billions of dollars in value as interest rates rose.
Active Super investments
All Active Super products have produced a positive return in the calendar year to April 2023, despite the issues with inflation, interest rates and bank failures overseas. Bond markets have benefited from a drop in the long-term bond yield, and share markets have been surprised that the economy has been able to avoid a downturn. Private markets have been good, although commercial property values have started to fall.
