Text on screen: James Maunsell, Account Manager
Maunsell: Welcome to this month's trade floor update. Today I'm joined by portfolio manager Aaditya Thakur. AT, it's been a frenetic start to 2026 for investors. Domestically, we've seen the RBA increase their policy rate for the second time in consecutive meetings. What fuelled that decision and what's the forward path from here?
Text on screen: Aaditya Thakur, Portfolio Manager, Australia & Global
Thakur: Yes, so the RBA raised rates by 25 basis points to 4.1%. But it was a really close call. It was 5 to 4. That kind of tells you something about the degree of cautiousness with these moves.
And I think we've got to frame these moves in the sense that it's all about getting inflation down to their target a little bit faster than they otherwise would. It's not about inflation being out of control and policy being vastly away from where it needs to be. It's really about a mid-cycle adjustment.
And why they moved this month as opposed to sticking to their quarterly pace? Well, Governor Bullock, alluded to this in her press conference where she said that the events from the Middle East, which are really the main events since the last meeting, forced their hand to bring forward that potential hike. In the statement they outlined the risks to inflation, to inflation expectations, particularly at a time when the labour market is a little bit tight and spare capacity is low.
So they really were worried about inflation. But what we thought was interesting was not so much what was said in the statement, which was all fair, but what was not said. There was little mention about the potential for this energy price shock to cause lasting demand destruction. We're already seeing anecdotes out of Asia, of countries rationing energy supplies, of some countries even imposing public holidays in the middle of the week to decrease energy consumption. And clearly that's going to weigh on growth in a region that's vital for us.
And when we think about the economy, obviously inflation is important, but it's a bit of a lag variable. When we look forward we're already seeing significant financial conditions tightening. We're seeing, borrowing rates for households and businesses rising. We're seeing the Aussie dollar rise sharply. The trade weighted index is up over 7% since November. We're about to see the impulse from fiscal policy start to turn negative and wealth effects from asset prices, so predominantly house price growth and equities, are also starting to turn negative.
Alongside that we've got our major regional trading partners also getting a bit of a growth hit. So all these things to us suggest that there will be some demand destruction. And that the outlook in 3 to 6 months time could be very different.
Now, Governor Bullock said that the RBA is well placed to adjust to those kind of changes, and it's our view that they may well need to a lot sooner than what markets anticipate.
Maunsell: AT, some very interesting comments there. Clients are coming to us with a sense of déjà vu from 2022. We've got surging energy prices, we've got global conflicts, and we've got upward pressure on inflation. Is this a return to 2022 and what happened as we can all recall? Or is today a fundamentally different story to what we saw a few years ago?
Thakur: Yes. I completely understand where people are coming from. But when we think about the initial conditions, they're very different to what they were in 2022.
In 2022, you did have this kind of energy shock. But that was coupled with a positive demand shock as well. You had economies that were opening up after Covid from Covid lockdowns. You had this pent up demand, which was also funded by large fiscal spending programs around the world. And you had monetary policy that was very, very loose.
You had cash rates that were near zero around the world, like well below neutral. So when you compare and contrast that to today, growth and inflation aren’t accelerating to the extent that they were back then. You don't have that kind of demand shock in conjunction with the supply shock.
Fiscal policy is actually neutral, if not slightly negative, as countries start to think about fiscal repair and some are even constrained by debt sustainability issues. And monetary policy around the world, you'd characterise as slightly tight relative to estimates of neutral rather than easy. So the starting position is very, very different. And I'd say that, coming back to this point around demand destruction, I think that will also limit what central banks will need to do.
And so from that perspective, we think that the markets have been very quick to price in these inflation risks from the supply side shock. But we haven't really priced in much in terms of potential growth risks.
And we think that, that those kind of growth risks and potentially even recession risks, should this conflict persist and this energy price shock be more prolonged, we think that that will start to come on the radar for markets soon.
And that's why we're keeping portfolios very defensively positioned, where we're maintaining high levels of liquidity than normal and lowering our exposure to more risk correlated asset classes and sectors, and really waiting for better opportunities should some of those recession risk be better priced in markets?
Maunsell: I think it's a great point AT. And for our clients that are building portfolios, how should they be thinking about fixed income and credit? And, where's the path forward from here and how should they be positioning in a portfolio?
Thakur: The great thing again, contrasting this to 2022 when interest rates were very low, and bond yields were low, right now, cash rates are already fairly elevated, above neutral.
And ten year yields are very attractive with Aussie ten year yields near 5%. You can start building a very defensive, liquid, highly liquid portfolio averaging yields of five and a half to 6% without taking much risk at all. And that seems like a pretty safe place to be, given all the uncertainty in the world today.
Maunsell: Thanks AT. Clearly plenty to discuss. For the clients that have questions, please don't hesitate to reach out to your PIMCO account manager.