Chapter 1: What is the main topic discussed in this episode?
On Point with Craig's Investment Partners.
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I'm Mark Lister, Investment Director at Craig's Investment Partners, and I'll be talking about a range of topics including economics, portfolio strategy, investor education, and anything else that's happening out there in financial markets.
G'day team, hope you're all well. Let's talk about the OCR today. When is it expected to rise? What will that mean for the economy, for markets and for investors? Well, the Reserve Bank meets at the end of this month, at the end of May, and there is an outside chance that the official cash rate, the OCR, will rise by 0.25% at that May meeting.
If there's no move this month, and that's probably more likely, the focus will shift to the July meeting. And in July, markets see a 0.25% hike as almost certain. That would be the first increase to the OCR in three years, and it would have come much earlier than anyone expected before the Iran conflict started.
After the OCR was reduced from its 15-year high of 5.5% to 2.25%, the next move was always going to be up. The only area of debate was when, with most economists and market watchers picking very late this year or early in 2027. That would have been an OCR increase to celebrate, if there is such a thing.
I say celebrate because it would have likely happened for the right reasons, namely an economic recovery on the back of falling unemployment, rising business profitability and higher activity. Interest rate rises that come against that sort of backdrop are usually taken in stride by investors and borrowers alike. However, a move this month or in July would be quite different.
That would be in reaction to worries that high fuel prices will feed into stronger inflation elsewhere. While it's debatable whether things will play out that way, businesses are telling us that they intend to raise their prices, or at least try to, and households are saying they expect that as well.
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Chapter 2: What is the Official Cash Rate and why is it important?
That'll be uncomfortable in the short term, but hopefully it will limit how far they ultimately need to push interest rates up overall. The Reserve Bank didn't move quickly enough in 2021 and 2022, and it ended up hiking the OCR from 0.25% right up to 5.5% in a relatively short space of time.
That was the most aggressive hiking cycle we'd ever seen, and the one-year mortgage rate tripled in just two and a half years. That is something the Reserve Bank will want to avoid again.
So if the OCR instead moves up earlier and more gradually, if it goes from 2.25% today to 3% relatively quickly, three hikes in quick succession, that will hopefully avoid bigger moves being needed down the track. The local share market might be a sideways performer while this runs its course, and investors might again find international markets a more lucrative hunting ground.
Another silver lining could come in the form of lower risk investment opportunities, as bonds and fixed incomes start to offer even more attractive levels of income. I hope that's useful, team. Thanks for listening. As always, we'll talk again soon. Enjoy your week. For more insights, visit craigsip.com.