Setting financial goals for 2024

The new year is a great time to reflect on your financial situation and plan for the future. Whether you want to save more, pay off debt, invest wisely, or simply live within your means, setting financial goals can help you achieve your desired outcomes. Here are some tips on how to set realistic and attainable financial goals for 2024.
Start with your “why”
Before you set any specific numbers or targets, think about why you want to improve your finances.
What are your values, dreams, and priorities?
How do you want to feel about your money?
Having a clear vision of your purpose can motivate you to stick to your goals and overcome challenges.
Assess your current situation
To set effective goals, you need to know where you stand right now.
Review your income, expenses, assets, liabilities, and net worth.
Track your spending habits and identify areas where you can save or cut costs.
Analyse your debt and interest rates and plan how to pay them off as soon as possible.
Set SMART goals
SMART stands for Specific, Measurable, Achievable, Relevant, and Time-bound. These criteria can help you create clear and actionable goals that are aligned with your vision and values.
For example, instead of saying "I want to save more money", a SMART goal would be "I want to save $10,000 by December 31, 2024 for a car". Be very specific, the more clarity you have over the goal the more achievable.
Break down your goals into smaller steps
Once you have your SMART goals, divide them into smaller and manageable tasks that you can do on a daily, weekly, or monthly basis.
For example, if your goal is to save $10,000 in a year, you can break it down into saving $833 per month or $192 per week. This way, you can track your progress and celebrate your achievements along the way.


Review and adjust your goals regularly
Setting financial goals is not a one-time event. You need to monitor your performance and evaluate your results periodically. If you are falling behind or facing unexpected challenges, don't give up. Instead, adjust your goals accordingly and find ways to overcome the obstacles.

On the other hand, if you are ahead of schedule or have achieved your goals early, don't stop there. You can either set new goals or increase the difficulty of your existing ones.
By Peter Kelly on 25 January 2024

Unlocking the Benefits of Appointing an Enduring Power of Attorney

By Peter Kelly

In today's world, it is crucial to plan for the future and make provisions for unforeseen circumstances.

One way to ensure our interests and well-being are protected is by appointing an enduring power of attorney (EPA).

An EPA grants someone we trust the legal authority to make decisions on our behalf when we are no longer capable. This powerful legal instrument offers numerous benefits that can provide peace of mind and safeguard our interests. Let's explore some of the key advantages of appointing an enduring power of attorney.

Protection During Incapacity

Life is unpredictable, and there may come a time when we are unable to make decisions for ourselves due to illness, disability, or mental incapacitation.

By appointing an EPA, we can ensure that a trusted individual, known as the attorney, will step in to make decisions in our best interests. This includes managing our financial affairs, paying bills, accessing bank accounts, and handling property matters.

The EPA acts as a safety net, guaranteeing that our interests are protected even when we are unable to voice our wishes.

Choice and Control

By appointing an EPA, we retain control over who will make decisions on our behalf if the need arises.

We have the freedom to choose a person we trust implicitly, someone who understands our values, preferences, and wishes. This ensures that our voice continues to be heard, and our best interests are upheld.

Without an EPA, decisions about our well-being may be made by someone appointed by a State-based civil and administrative tribunal, which may not align with our desires.

Seamless Financial Management

Appointing an EPA streamlines the financial management process during incapacitation.

Our attorney can handle financial transactions, pay bills, manage investments, and ensure our financial affairs remain in order.

This eliminates the need for lengthy processes, such as guardianship, which may otherwise be required to grant someone the legal authority to act on our behalf.

Reduction of Family Conflicts

In situations where there is no appointed EPA, family members may have differing opinions about who should make decisions on behalf of an incapacitated individual. This can lead to conflicts, causing emotional stress and strained relationships.

Appointing an EPA in advance minimises the potential for such conflicts by clearly designating the person who will make decisions, eliminating ambiguity and promoting family harmony during challenging times.

Preservation of Dignity and Autonomy

An EPA ensures that our dignity and autonomy are upheld even when we are unable to make decisions independently.

By appointing someone we trust as our attorney, we can rest assured that our values and preferences will guide the decision-making process.

This helps preserve our identity and ensures that our wishes are respected, even in situations where we cannot communicate them directly.


Appointing an enduring power of attorney is a prudent step to protect our interests, maintain control over our lives, and alleviate potential burdens on loved ones during times of incapacity.

It provides peace of mind, promotes family harmony, and safeguards our dignity and autonomy.

By choosing a trusted individual to act on our behalf, we ensure that our best interests are prioritised, and our wishes are respected.

Embracing the benefits of an EPA empowers us to navigate the future with confidence, knowing that our affairs are in capable hands.

Cost of Living Pressure

By Peter Kelly
Ever since inflation started its upward spiral in 2021, many, if not all Australians, have felt its impact to some degree or another. Just last weekend, I put fuel in my car - it had been running on empty for a few days. At $2.25 a litre, this was around 60% more than I was paying for the same litre back in 2021. But, of course, it is not fuel that is the culprit here.
Many of the basics, including food, mortgage interest, rent, housing prices and health care, have all been increasing significantly.
Sadly, wages have not kept pace with inflation, so it is becoming increasingly harder for many Australians to get by from one payday to the next. We also need to spare a thought for those living on a fixed income who don’t have the joy of any form of protection against inflationary pressures.
Hopefully, inflation will be back to the Reserve Bank’s target range of between 2 and 3% in the not-too-distant future. Let’s hope prices follow.

Having said that, I think there is still some pain to be endured, with the likelihood of another one or two interest rate rises in the coming months.

So, what are ten things we can do to help weather the storm of increasing prices:
  1. Budget wisely – track income and expenses and identify areas where we can cut back.
  1. Cut non-essential spending – cancel unused subscriptions and memberships, dine out less frequently, and avoid impulse buying.
  1. Shop smarter – look for discounted items, compare prices, and consider buying generic or store-branded items.
  1. Stock up on essentials – when items are on sale, particularly non-perishables, consider stocking up.
  1. Invest in skills and DIY – reduce the costs of home maintenance by spending time carrying out simple household repairs and maintenance rather than calling in contractors and tradies. YouTube is a great source of knowledge when it comes to learning to carry out simple jobs around the home.
  1. Explore alternative transportation – consider car-pooling, walking, riding a bike, or using public transport. Also, planning of time can help reduce unnecessary trips.
  1. Refinance high-interest debt – consider refinancing or consolidating loans to a loan with a lower interest rate.
  1. Build an emergency fund – having some money set aside for emergencies can provide a very welcome safety net and reduce the reliance on using debt to manage unexpected expenses.
  1. Invest wisely – reviewing current investments to ensure they are appropriate for the times. If money is being held in low or no-interest savings accounts, consider moving money not needed for everyday expenses to an account that offers a higher rate of interest. Always consider seeking the advice of a financial adviser to help select appropriate investments.
  1. Earn extra income – whether it is doing overtime, taking on a second part-time job, freelancing, selling unused items, or even renting out a spare room, there are lots of options to consider when it comes to generating additional income. Even for those who have retired and are receiving the age pension, part-time work can provide a significant boost to income without detrimentally affecting the rate of pension being received.
Managing finances in tough times can be difficult. Making some small changes to the way we live may result in some short-term hardship; however, it just might help in navigating the current challenges being faced by so many Australians.   

RBA Alters Inflation Expectations and Modifies Rate Messaging

Following its most recent interest rate hike, the Reserve Bank has adopted a more cautious stance, even though it acknowledges that inflation is persisting longer than anticipated
The Reserve Bank of Australia (RBA) has broken its pattern of keeping rates unchanged due to the persistent inflation pressure it faces. The central bank is now projecting a slower path toward achieving its target range of 2 to 3 percent for headline inflation. 
In its November meeting, the RBA implemented its 13th rate hike since the initiation of its tightening policy in May 2022. The official cash rate was increased by 25 basis points to 4.35%, marking the first rate hike after staying on hold in July, August, September, and October. 
RBA Governor Michele Bullock commented, "Inflation in Australia has peaked but remains too high and is proving more durable than it was a few months ago. The latest Consumer Price Index (CPI) reading shows that while goods price inflation has continued to decline, the prices of many services are still rising rapidly." 
The Australian Bureau of Statistics (ABS) reported a 1.2 percent increase in the Consumer Price Index (CPI) during the September quarter, resulting in a year-on-year increase of 5.4 percent. 
According to the RBA's revised forecasts, CPI inflation is now expected to decline to approximately 3.5 percent by the end of 2024 and return to the top of the target range by the end of 2025. Previously, the central bank had predicted a drop to 3.3 percent by the end of 2024 and 2.8 percent by the end of 2025. 
Ms. Bullock stated, "The decision to raise interest rates today was made to have more confidence that inflation would return to the target within a reasonable timeframe." She also warned that updated data received since the August meeting indicates an increased risk of inflation remaining elevated for a longer period. 
While the economy is currently experiencing below-trend growth, it has been stronger than anticipated during the first half of the year. Underlying inflation has been higher than expected in August's forecasts, especially in various service sectors. Labor market conditions have eased somewhat, but they still remain tight, and housing prices are on the rise nationwide. 
Since the October meeting, the RBA has included "the implications of international conflicts" as an additional uncertainty in its outlook, alongside longstanding concerns like service price inflation, monetary policy lags, and household consumption projections. 
The statement post-meeting no longer suggests that "some further tightening of monetary policy may be required." Instead, Ms. Bullock emphasized that "whether additional monetary policy tightening is needed to ensure inflation returns to the target in a reasonable timeframe will depend on the data and evolving risk assessments." 
Gareth Aird, Commonwealth Bank's head of Australian economics, noted that although the RBA maintains a tightening bias, it has softened it somewhat. He suggested that unexpected positive economic data, particularly regarding inflation, would be necessary for the RBA to raise the cash rate again. 
Mr. Aird's base case scenario foresees the RBA maintaining the current monetary policy stance, with a possible monetary easing cycle beginning in September 2024. However, he acknowledged the short-term risk of another interest rate increase, given the RBA's continued bias toward tightening. Consequently, markets will likely continue to factor in the possibility of a near-term rate hike. 
If the RBA does decide to raise rates again, Mr. Aird pointed to February 2024 as the most likely timing, as it would coincide with the release of Q4 2023 CPI data and updated economic forecasts.
Luci Ellis, Westpac's chief economist and former RBA assistant governor, observed that the RBA's November decision marks a departure from previous meetings where the central bank appeared content to maintain the status quo and monitor developments. She believes that while a December rate hike is unlikely, the February meeting could become more significant if the inflation outlook continues to improve. 
On the other hand, Sean Langcake, Head of Macroeconomic Forecasting at Oxford Economics, suggested that the RBA might need to make further moves to achieve its inflation target if it is genuinely concerned about the inflation outlook. A single 25-basis-point increase may not be enough to alleviate their concerns. The board may wait for the next set of inflation data and potentially raise rates in February, particularly if the Wholesale Price Index (WPI) shows significant strength.

What is …..the First Home Super Saver scheme?

The First Home Super Saver (FHSS) scheme was introduced in July 2017, with eligible people able to access certain superannuation contributions from 1 July 2018.

The scheme was designed to help Australian first home buyers enter the housing market by allowing access to certain superannuation contributions and their associated earnings.

Several enhancements have been made to the scheme since it was introduced.

In general terms, the scheme allows eligible first home buyers to withdraw voluntary contributions made to super since 1 July 2017, along with the associated earnings on those contributions.

Voluntary contributions generally include all personal contributions a person makes to super. This includes personal tax-deductible contributions, contributions made under a salary sacrifice arrangement (where salary is foregone in return for an employer making additional contributions), and non-concessional contributions. Non-concessional contributions are personal contributions made from “after-tax” income. Mandated employer contributions, including Superannuation Guarantee contributions, cannot be accessed under the FHSSs.

When applying for the release of super, up to $15,000 of annual contributions may be released. Up to 100% of non-concessional contributions and up to 85% of personal tax-deductible and salary sacrificed contributions can be released (i.e., a maximum of $12,750 per annum).

The maximum contributions that can be released under the FHSSs is $50,000.

In addition to accessing contributions, the associated earnings on the contributions can be released.

However, the associated earnings are not based on the actual investment earnings achieved on the contributions. When requesting a FHSS determination, the Australian Taxation Office (ATO) will calculate the associated earnings based on a formula set out in legislation.

When seeking to access superannuation under the FHSS scheme, the first step is to request a FHSS determination. This can be requested through an individual’s My.Gov account. The determination sets out the amount that can be released under the scheme. A person can apply for as many determinations as they wish.

When seeking to have superannuation released under the scheme, an application is made to the ATO to issue a release authority. Only one release authority can be lodged.

The released amount is paid to the ATO by the super fund, which will then deduct tax, if applicable, and will forward the balance to the individual.

While any non-concessional contributions withdrawn are not taxable, the associated earnings and any personal tax-deductible and salary sacrificed contributions are taxed at the individual’s marginal tax rate, less a 30% tax offset.

When planning to withdraw contributions from superannuation, the amount withdrawn must be applied to the purchase or construction of a home within 12 months. The individual must occupy the home as their main residence for at least six months in the first 12 months of ownership. Release of funds may also be requested within 14 days of having signed a contract to purchase or construct a first home. However, from September 2024, this will be extended to 90 days.

If a home is not purchased within 12 months, the funds released can be recontributed to super. If not recontributed, additional tax is payable.

To be eligible to withdraw money from super under the FHSS scheme, a person must:

  • Not have owned property in Australia previously,
  • Be aged 18 or older; and
  • Not previously had an amount released from super under the scheme.

Being able to access super to contribute towards the purchase of a first home is a strategy that may be attractive to many first home buyers. However, like most things, the devil is in the details. Whether this is an appropriate strategy will depend on personal circumstances.

Is the government eyeing off your super?

By Peter Kelly on 20 September 2023

At the end of March 2023, there was a massive $3.5 trillion held by everyday Australians in superannuation.

That is $3,500,000,000,000.

For any government with ambitious spending plans, this could be an attractive pool of money to target.

In a previous blog, “What is the purpose of superannuation?” I mentioned one idea being circulated that would see superannuation potentially being used to fund the cost of providing aged care.

The word being used in this context was “ring-fencing”.

The concept of ring-fencing could see a situation arise where a portion of one’s superannuation savings are set aside to cover potential (future) aged care costs. If this was ever introduced, it would mean a person would only have access to a portion of their superannuation savings to fund their general retirement living expenses. Part of their savings would need to be quarantined to fund future aged care needs.

But let’s not get too far ahead of ourselves. I think this is a long way off and is unlikely to be a politically palatable pill for any present or potential government to swallow.

The legislation to enshrine an objective in superannuation is currently open for consultation. It appears to be innocuous in its current form.

As mentioned in a previous post, the objective of superannuation is proposed to be:

“To preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”

The explanatory materials accompanying the draft legislation include the following paragraph (paragraph 1.8):

“The superannuation system is an important source of capital in the economy which can support investment in capacity-building areas of the economy where there is alignment between the best financial interests of members and national economic priorities.”

While the statement addresses the “best financial interests of members” (of superannuation funds), this is balanced with “national economic priorities”.

Does this mean that superannuation could be targeted as a source of investment in specific areas, including housing, infrastructure, technology, community, and the like?

Put simply, could a government mandate our superannuation be invested in areas other than those we might voluntarily choose to participate in?

This raises an interesting academic question and one that I am sure will be pondered by experts for many months and years to come. Incidentally, for those who might suggest the government would never dictate how our superannuation should be invested, here is a quick history lesson.

In 1961, the “30/20 rule” was introduced. Superannuation funds were required to invest at least 30% of their assets in public securities, with 20% being invested in Commonwealth-issued securities (e.g. Government bonds), if the funds were to receive concessional tax treatment.

The 30/20 rule was eventually abolished in 1984.

While the 30/20 rule was a “soft compulsion” – that is, superannuation funds received tax concessions in return for compliance – it is an example of how governments may implement policy to achieve outcomes consistent with their policy objectives.  

With superannuation now comprising of such a large component of the economy, it will continue to remain the focus of all potential governments, irrespective of their political persuasion.

The “sanity-saving” benefit of an emergency fund

Recently I was confronted with a challenging situation at home.

I woke one morning to find that one of our power circuits had “blown”. Fortunately, the hot water was still flowing so my mandatory “wake up” shower was not jeopardised.

A local electrician was able to call by that day to diagnose the problem and provide a temporary fix.

As it transpired, the underground power cable from the street to our switchboard had shorted.

To remedy the problem and provide a future-proof fix, the electrician and his “mate with the digger” spend several days tracing the power supply to our house, excavating, cutting through the driveway, and as I write, hopefully reinstating the power to our house.

Some years ago, perhaps because of watching too many YouTube videos on living a financially secure life, we established an emergency fund. This has continued to grow to a point where we have a comfortable nest egg.

The cost of my electrical repairs will run into five figures. Knowing that this expense is covered has led to considerably less stress.

Had we not had the funds available, I am not quite sure what we would have done. The temporary fix was just that – temporary. The repairs needed to be carried out without delay.

Having access to a robust financial safety net, when it’s needed to cover an emergency, can deliver a comforting sense of security.

Some of the reasons supporting the establishment of an emergency fund include:

  1. Weathering the Storm of Uncertainty: 
    Life is unpredictable, and emergencies can occur at any time. 

    Whether it's a sudden medical expense, car repair, or unexpected job loss, having an emergency fund acts as a cushion to absorb the financial blow. 

    Instead of resorting to credit cards, loans, or borrowing from friends and family during times of crisis, an emergency fund enables us to address these situations confidently, avoiding the debt trap and protecting our financial well-being.
  2. Eliminating Financial Stress:
    Financial stress can take a severe toll on both mental and physical health. 

    Having an emergency fund can alleviate the anxiety and worry associated with money-related emergencies. 

    Knowing that you have a financial safety net to fall back on can reduce stress levels, enhance overall well-being, and improve decision-making during challenging times.
  3. Preventing Disruption of Financial Goals: 
    Without an emergency fund, people often end up diverting money allocated for long-term financial goals, such as retirement or buying a home, to handle unexpected expenses. 

    This diversion can significantly slow down or even derail progress toward these objectives. 

    An emergency fund, however, allows individuals to maintain their financial goals undisturbed, ensuring steady progress toward a secure financial future.
  4. Avoiding High-Interest Debt: 
    Relying on credit cards or personal loans to cover emergencies can lead to a vicious cycle of debt. 

    These options often come with high-interest rates, making it challenging to repay the borrowed amount promptly. 

    With an emergency fund, individuals can avoid accumulating such high-cost debts, which can save them substantial amounts of money in interest payments over time.
  5. Capitalising on Opportunities: 
    In times of economic downturn, opportunities for investment or purchasing assets at discounted prices can arise. 

    Having an emergency fund positions individuals to take advantage of these opportunities, as they will have readily available cash to invest when others may be strapped for funds. 

    This can lead to significant financial gains in the long run.
  6. Enhancing Financial Discipline: 
    Establishing an emergency fund requires discipline and regular contributions. This practice can instill good financial habits and discipline in managing money. 

    Consistently setting aside a portion of income builds financial responsibility, making individuals more resilient in handling both expected and unexpected expenses.
  7. Promoting Independence: 
    Relying on others for financial help during emergencies can lead to feelings of dependence and strain on relationships. 

    An emergency fund empowers individuals to tackle challenges independently and preserves their autonomy and dignity during tough times.

Starting an emergency fund may seem daunting, but even small, regular contributions can make a significant difference over time. 

It's never too late to begin building this essential safety net and experiencing the countless benefits it offers in safeguarding your financial well-being. 

Take the first step towards financial security today, and rest easy knowing you have a lifeline to face any challenge that comes your way.

Markets up on worsening economic data.

Local and global stock markets rose this week on the back of weaker economic data.

Australian employment unexpectedly fell in April with 4,300 fewer people employed versus March. The fall saw the unemployment rate tick up to 3.7% with an additional 18,400 unemployed.

The minutes of the RBA’s May meeting show that the decision to raise by 0.25% was a close one, but concerns surrounding strong services inflation pushed the call over the line.

Eurozone industrial production fell by 4.1% in March, coming in well below expectations and the biggest fall since April 2020. The largest contractions came from Ireland and Germany.

The European Union raised its inflation forecasts to 5.8% this year and members expect the European central bank to continue with rate hikes.

Japan’s economy emerged from recession and grew faster than expected in the first quarter as post-covid consumption rebounded strongly.

US President Biden cancelled his trip to Australia for the Quad meeting and shortened his G7 trip to Asia to focus on resolving the US debt ceiling debacle which remains ongoing. Estimates have the US government running out of money to meet expenses as early as 1 June.

Top of Mind: Debt Ceiling in Focus

The latest concern and risk that investors are having to contend with is the prospect of the United States defaulting on trillions of dollars’ worth of loans. That is unless the Republicans and Democrats strike a deal to legally allow the US Department of Treasury borrow more though debt to allow it to pay its bills.

The amount of debt that the US can incur is known as the debt ceiling and the “X date” is the date at which the US will hit that limit. While the exact date for the “X date” is hard to predict, Treasury Secretary Janet Yellen has indicated the government will fall short of funds by mid-June. 

Thankfully over the weekend, debt ceiling talks that had stalled were back on with Joe Biden and Kevin McCarthy agreeing to resume negotiations to avoid the US defaulting. This came a day after they broke off talks! 

If Democrats and Republicans do not agree to allow the US to raise the debt ceiling - the world's biggest economy will default on its $31.4 trillion (£25tn) debt. If the US does not lift its debt ceiling, it will not be able to borrow more money - and it will quickly run out of funds to pay for public benefits and other obligations.

The White House Council of Economic Advisers estimates that if the government cannot reach a debt ceiling agreement for a prolonged period, the economy could shrink by as much as 6.1% which would most likely tip the US into the recession that it is heading towards. That would have big knock-on effects for the rest of the world, many of which count the US as a key trading partner.

In addition, the US dollar is the reserve currency of the world. Should the US government default, the value of the dollar is expected to drop sharply with knock on effects for commodities and commodity orientated economies such as Australia.

It could also exacerbate the inflationary problems we have already been facing. With a weakening US dollar, everything would need to be repriced. That could lead to food and fuel becoming more expensive and would again raise the cost of living for millions of people.

The stock market is also likely to react badly to a US default as it erodes confidence in the world’s largest developed market economy. We don’t think that will be the case though. If history is a guide, you would expect a resolution to be met. Although, it wouldn’t be surprising to see it left to the last minute and create a lot of volatility across markets. That is what we saw in 2011 when the Democrats and Republicans remained at an impasse over the debt ceiling until hours before a potential default. US stock markets plunged but it was short-lived, and shares recovered from the sharp fall once details of the deal became known. We think we are likely to see the same again this time round.

US inflation continues in the right direction.

Local and global equity markets were mixed this week with contrasting signals across economic data including falling US inflation, a UK rate rise, and weakness out of China.

Westpac shares rose after the bank lifted its dividend by 15% and announced a first half net profit increase of 22% to $4 billion. Commonwealth Bank shares rose following its quarterly result with the bank reporting a net profit increase of 1% to $2.6 billion but said that net interest income was 2% lower in the quarter.

The Federal Budget surprised with a $4.2 billion surplus, a significant improvement from the last estimate of a $36.9 billion deficit, with stronger than expected revenue from mining, corporate and income taxes. The government showed some fiscal restraint, but no plans to fix likely budget deficits in the years to come.

Australian new house lending rose by 4.9% in March, the first increase since January 2022, with lending to owner occupiers rising by 5.5% and to investors by 3.7%. Lending to first home buyers rose by 12.3%. The rise for the month was a big shock and may put further pressure on the RBA to maintain tighter monetary conditions.

Australian building approvals in the first quarter were the weakest in 11 years whilst business conditions fell in April. Australian retail trade volumes fell by 0.6% in the March quarter. Outside of the covid period, this was the largest quarterly fall in volumes since the GFC. Cost of living pressures along with higher interest rates finally hitting home.

US consumer prices rose at a 4.9% annual pace in April, slowing slightly from March and coming in below expectations. The annual core figure, which excludes food and energy, rose 5.5% in April down from 5.6% in March

German industrial production fell more than expected in March which saw recession fears escalate in Europe’s largest economy. Production decreased by 3.4% on the previous month partly due to weak performance by the automotive sector.

The Bank of England hiked rates by 0.25% to 4.5% at its May meeting, bringing interest rates to their highest level since 2008. The lift was widely expected.

China’s consumer inflation slowed to the weakest pace in two years in April while producer prices fall deeper into deflation. Stimulus likely to be required but authorities playing the waiting game for now.

US Treasury Secretary Janet Yellen said there are no good options for solving the debt ceiling stalemate and cautioned that resorting to the 14th Amendment would cause a constitutional crisis. There is a deal to be had, but President Biden is holding Congress hostage by not being amenable to any future budgetary cuts. US deficits are out of control and getting larger.

RBA Decision – May 2023 

The Reserve Bank of Australia (RBA) Board has increased the cash rate by 0.25% to 3.85% at its May meeting. 

The move was a fairly big surprise for markets given the largely consensus call for another month of pause. Whilst the March quarter inflation print was pleasingly lower, confirming a lower trajectory ahead, the mix of underlying components showing some “stickiness” effectively forced the RBA’s hand to push monetary settings further into contractionary territory to ensure the inflation trajectory continues lower. 

There were some key changes to their May statement relative to the prior month. 

Key points of focus include: 

  • A tone of impatience creeping into the statement – ie. inflation is still too high; it will be some time yet before it is back in target range; importance of returning inflation to target within a “reasonable timeframe”. 
  • Reiterated their inflation forecasts of 4.5% for 2023 and 3% for mid-2025. • Happy with goods price inflation falling but unhappy with services price inflation, particularly the combination of rising labour costs without any productivity increases. 
  • Reiterated their economic growth forecasts of 1.25% for 2023 and around 2% over the year to mid-2025, with unemployment set to increase to 4.5% in mid-2025. 
  • Confirmed their commitment to return inflation to target but again emphasised “in a reasonable timeframe”. 

We still believe that the RBA is near the end of this hiking cycle given the lagged effect of the cumulative rate increases since May 2022, but they will need to see continued evidence of headline and particularly underlying inflation falling over the coming quarters, and/or a subsequent pick-up in productivity growth. 

Following their announcement, Australian equities moved lower, the AUD/USD rose, and bond prices fell (ie. yields higher).

Top of Mind: April Angst Continues As Banks Back in Focus

Local and global equity markets were mixed to slightly weaker for the week as investors digested key economic data and US banking sector stress. 

US banks came under pressure again after First Republic, a San Francisco bank, reported a poor set of quarterly results, with investors again questioning the regulator / central bank’s resolve. 

The US economy is proving resilient, but we continue to expect rapid monetary tightening to trigger a recession later this year. Our models still point to elevated recession risk, and a recession beginning later this year remains our base case. Stresses in the banking sector mean that credit conditions are likely to continue to tighten, consistent with the Fed killing the cycle. 

Internationally, central banks continue to be the focus with the US Fed and ECB both expected to hike rates. In the US we are likely to see a 25bps hike which is almost fully priced in now by the market. Powell’s comments will be closely scrutinised to see if further hikes are on the table or if they pivot towards the market which is expecting the Fed to begin cutting through the latter part of this year. Over in Europe, the ECB meets with markets torn between 25 vs. 50bp, although we think 25bps more likely.

Australian headline inflation rose by 1.4% in the quarter which saw the annual rate fall to 7%. The RBA’s preferred measure of underlying inflation increased by 1.2% in the quarter with the annual rate falling to 6.6%. Goods inflation falling sharply, services inflation going the wrong way. Good to see it lower overall, but plenty of work still to be done.

A Shift in the Winds for the RBA

The Government has just released the findings that outline 51 recommendations of the independent committee that has been reviewing the RBA since July last year. The government for their part has endorsed all of the recommendations, and will seek to legislate on the subset that requires amendments to the Reserve Bank Act.

The most significant recommendations relate to the dual mandate of the RBA and recommends the splitting of the board structure into separate policy-making and governance limbs. It also recommends a reduction in the board’s meeting frequency in relation to policy decisions.

What Does This Mean?

The report contains 51 recommendations but key recommendations of importance for markets are:

  • The independence of the RBA and the 2-3% inflation targeting framework will be maintained.

The report recommends a renewed Statement on the Conduct of Monetary Policy be put in place by the end of 2023 and directs the RBA to target the midpoint of the 2-3% range to provide more clarity and accountability.

  • A new Monetary Policy Board (MPB)

The new MPB will be created with responsibility to enact monetary policy, with the existing Board to manage other operational and governance matters. The MPB will be comprised of the Governor and Deputy Governor, the Treasury Secretary, and six external experts – appointed for five-year terms. This will allow greater challenge to the views presented to the Board, one of the criticisms of the report.

  • Maintains flexibility

Importantly, the report does not remove the flexibility that the RBA enjoys by setting any timeframes in which inflation if exceeding the range, should be returned to target. The report does require the RBA to provide clarification of the state of employment relative to full employment and directs the RBA to target the midpoint of the 2-3% range and drops ‘on average, over time’.

  • Number of meetings

The report recommends that the Bank should hold eight meetings per year - instead of the current eleven meetings – as is the practice of other major central banks.

  • Greater transparency

The Governor will be required to hold press conferences after each monetary policy meeting to explain the outcome of the meeting and the strategy of the MPB to further increase transparency of discussions and decisions. For even further transparency, the unattributed votes of the MPB will also be released. Additionally, external members of the Monetary Policy Board will be allowed to discuss decisions and their thinking publicly. Debate on appropriate policy will likely therefore be more transparent.


Few believed that the 2-3% inflation target band was likely to be changed and while the recommendations look for the RBA to target the mid-point, there is no real impact.

Implications for monetary policy would mostly likely come through changes to the structure and composition of the board. The recommendations also bring to question whether the existing governor will seek or be granted another term. Implications for the recommendations are still being worked through but changes that dilute the power of Governor Lowe and suggestions his term will not be renewed this year would be perceived as hawkish by the market. Those that added representation by organized labour would be perceived as dovish. 

Even the proposed reduction in meeting frequency from 11 to 8 per year still needs working through. Governor Lowe has argued the RBA’s relatively high meeting frequency allows the board to take smaller more frequent steps compared to others. Lowe argued that delivering a given magnitude of hikes over a longer period can help remind the public that conditions are tightening, and so help anchor inflation expectations.

For now, we wait to see whether the RBA will move ahead in adopting some of the recommendations of the review ahead of time. Recommendations like holding press conferences would be simple to implement but targeting the midpoint of the target band more explicitly in the Board’s thinking in the near term would be a more significant one.

Events this week:

With another four-day week ahead of us, local focus will be on the March employment report (Thursday) and NAB business and consumer confidence surveys.

Overseas, on Wednesday we will see the US March CPI report. While the headline rate is seen dropping to 5.1% from 6.0% thanks in large part to sharp year on year fall in energy prices, the focus is on the core (ex-food and energy) reading where all the talk is around stickier inflation.

FOMC Minutes are on Thursday, while the US earnings seasons kicks off with particularly keen interest in the banking sector given all the recent turmoils.