Aura Private Credit: Letter to investors 13 February 2023
Last week, the Reserve Bank of Australia (RBA) lifted interest rates off the back of the heightened inflation data that came in for the December 2022 quarter.
RBA Monetary Policy Decision 1
The RBA decided to lift the cash rate by 25 basis points, bringing it to 3.35 per cent.
The decision driven by inflation again, was backed by the December 2022 quarterly CPI data posted last month. For the quarter it rose by 1.9 per cent equating to a 7.8 per cent increase over the 12 months up to December 2022. This level of inflation now sits at the highest level since 1990. Global factors continue to be the leading cause of the persistent level of inflation, with strong domestic demand adding pressure in a number of areas within the economy.
The RBA has noted that inflation remains too high to pause with the monetary policy intervention at this stage. On a positive note, they do expect inflation to ease this year as global factors are resolved, and domestic demand declines due to the ongoing pricing pressures and heightened interest rates flowing through to households and borrowers. Their central forecast has CPI declining to 4.75 per cent this year and 3 per cent by mid-2025. Medium term expectations have inflation remaining stable.
With inflation the RBA’s key concern, economic growth expectations remain subdued. Growth over 2022 was strong but is expected to slow to around 1.5 per cent over 2023.
Although there is a lag in seeing the full effect of monetary policy shifts, it is likely that the RBA will have to make further increases to the cash rate in the coming months, given the mismatch between household’s borrowings and spending. There remains uncertainty around the timing and extent to the slowdown in household spending, given some have substantial savings buffers whilst others are experiencing the pain due to increased mortgage repayments and overall cost of living pressures.
The labour market also currently remains tight and steady at 3.5 per cent, however a slight easing is on the horizon with a reduced number of job vacancies and ads. The RBA expects unemployment to increase to 3.75 per cent by the end of this year, remaining healthy.
As has been consistent, the RBA is looking to rein inflation back to the 2-3 per cent target range and they believe further increases in the interest rates over the months ahead will be required to achieve this.
1 Monetary Policy Decision, Reserve Bank of Australia, 7 February 2023
Brett Craig is responsible for portfolio management and asset origination for the Aura High Yield SME Fund and the Aura Core Income Fund. Prior to joining Aura Group, Brett held a number of roles at Macquarie Group over an 11 year period including Vice President within the Debt Markets business where he focused on originating, structuring and distributing debt products primarily in the Australian market.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
