Fixed Interest
Overview
Fixed interest returned 0.78% over the quarter ending 31 March
2012 while cash returned 1.12%.
The RBA left the official cash rate unchanged over the quarter at 4.25%. Minutes from the March Board meeting provide an insight into their deliberations:
"...weakness in parts of the economy – including manufacturing, building construction and parts of the retail sector – was being approximately balanced by the strength in the mining sector and some service industries"
"on balance the Board considered that it was appropriate for interest rates to be around their average levels, which was judged to be the case at present."..... RBA Minutes 6 March 2012
These comments are important because they confirm that:
- The RBA believes that growth is running close to trend (Among other things, they point to the unemployment rate which remains low and relatively static despite recent manufacturing job losses); and
- With growth close to trend, the RBA has now clearly adopted a neutral interest rate setting. This means it views inflationary risks as being evenly balanced, which is about right as underlying inflation remains in the mid-range of its target. With inflation under control, the RBA will reduce rates if (but only if) growth slows.
Conclusion
With China slowing and commodity prices easing, it is possible
that some mining projects may be deferred which would reduce
inflationary pressures and provide the RBA with some scope to ease
rates modestly. Whether this occurs over the June quarter remains
to be seen but we believe the probability is increasing. In
conclusion, we continue to recommend an overweight cash position
and a neutral fixed interest exposure.
Related articles...
- Australian Economy - Economic & Market Outlook - As at 31 March 2012
- International Economy - Economic & Market Outlook - As at 31 March 2012
- Australian Equities - Market Outlook - As at 31 March 2012
- International Equities - Market Outlook - As at 31 March 2012
- Australian Real Estate Investment Trusts (Listed Property or "AREITs") - Market Outlook - As at 31 March 2012
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