Reality bites

The global growth outlook continues to soften, with rampant inflation and the withdrawal of the extremely accommodative monetary settings. Policy tightening is the correct course, but it will be challenging to navigate the withdrawal of stimulus and there is a material risk of a policy overshoot. This environment has seen yields rise and equities fall, putting pressure on the returns of traditional equity/bond style portfolios.

The question for markets now is whether we have reached peak inflation and monetary policy tightening expectations. Central banks will be hard pressed to shift to more dovish rhetoric against the current backdrop and there will need to be unambiguous price signals over the next few months to precipitate a central bank pivot.

In Australia, the Reserve Bank of Australia (RBA) began the process of removing monetary policy accommodation in May, raising rates by 25 basis points to 0.35%. This is the first episode of monetary tightening since November 2010 and comes after the period of exceptionally stimulatory settings that were appropriate for the pandemic. The RBA has now moved away from what was relatively dovish rhetoric centred on ‘patience’, with recent communications setting the stage for further monetary tightening in coming months.