Why T. Rowe Price says Australia is a safe haven for bond investors
In October, the Reserve Bank shocked fixed income markets by moderating the magnitude of interest rate hikes to 0.25 percentage points from 0.5 percentage points, becoming the first central bank to an advanced economy to do so. The spot rate is 2.6% and annual inflation is 6.1%.
“Certainly they slowed down the pace of the hike. And I think they believe their economy here is so different from the rest of the issues there,” Husain said.
Australia is currently one of the most preferred long positions in Mr. Husain’s portfolio, he added.
The fund manager said muscle memory had a lot to do with financial markets misunderstanding the nature of the inflation spike.
The Australian consumer price index for the September quarter is released on Wednesday after Tuesday’s federal budget. Economists expect the CPI to accelerate to 7%.
“Nobody believed that inflation was really going to burst in a quasi-permanent perspective,” Husain explained.
“People are just too slow to party to accept that inflation is probably going to be structurally higher over time. I hear it again. “Oh, it’s all about COVID supply chains. It’s all about Chinese policies zero COVID.It’s all due to the war in Ukraine.
“But there’s a lot more going on behind it. And certainly, from our point of view, we expect higher inflation.
This will be reflected in the studied measures of rising inflation expectations. “Actually, long-term inflation protection is still quite cheap. That’s how we think about it right now,” Husain said.
Just as central banks have been too slow to recognize that inflation is out of control, the fund manager said the monetary response will be excessive policy.
“I am convinced that central banks are now in policy error space… just as it was very clear that all transitional inflation was policy error,” he said. “They weren’t walking fast enough. I think we are now in another period of political error, where they are going to continue to hike too much for too long.