Video transcripts layout 1 | Insight Investment

The RBA raised interest rates by 25 basis points at its May meeting, marking the third consecutive meeting in which rates were increased. This brought the policy rate to 4.35%, the same level reached at the peak of the 2022–2023 tightening cycle.

The decision was driven by domestic inflation continuing to surprise to the upside. In addition, conflict in the Middle East increased the risk that inflation expectations could become de-anchored, adding further pressure on the central bank to act.

However, the RBA has indicated that it is likely to pause and adopt a more cautious, wait-and-see approach over the next one or two meetings. Both the market and our team expect one additional rate hike later in the year.

Following that, we anticipate an extended period of stable policy rates at around 4.6%. Rate cuts are unlikely until next year, when the negative growth effects of higher energy prices and the cumulative impact of previous rate increases begin to weigh more heavily on the Australian economy.

The decision was not unanimous, with the vote split 8–1. The lone dissenting member expressed concerns about the extent of demand destruction that could result from the energy price shock.

Against this backdrop, we continue to view longer-dated Australian government bonds as attractive investments. With 10-year yields around 5%, we believe the risk-reward profile remains compelling. As a result, we continue to hold Australian duration exposure, either outright or on a relative-value basis against other developed markets within our portfolios.