Insights


Markets Price in Interest Rate Hikes Despite RBA Assurances

Head of Investment Strategy & Research, Australia

  • Reserve Bank of Australia (RBA) continues to indicate that interest rates are on hold until actual inflation is sustainably within the 2 to 3 percent target range, which is not expected before 2024.     
  • Increased divergence in views between the RBA and the market – major Australian banks are increasingly moving forward their expectations on when we will see a rate hike.
  • Rising interest rates will negatively impact the value of fixed rate obligations, longer dated bonds will have greater duration and thus are subject to greater price volatility from changes in interest rates.
  • Floating Rate Notes (FRN’s) are generally impacted to a lesser degree.
  • FRN’s periodically reset to a spread over LIBOR or the effective base rate. In a rising rate environment, the floating rate can enable investors to earn higher income over time.   
  • FRN’s are a portfolio diversifier given their relatively low correlations with most major asset classes – the floating rate structure of loans is the driver of the low correlation.

Figure 1: Implied Overnight Rate and Number of Hikes/Cuts

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Figure 2: Markets Are Now Pricing Multiple Rate Hikes in 2024

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