Franklin Templeton Favors Australia Bonds, Bets RBA on Hold

(Bloomberg) -- Australia’s central bank will likely keep interest rates at record lows in 2018 as inflation remains under control -- giving investors reason to hold the nation’s bonds, according to Franklin Templeton Investments.

That’s the forecast of John Beck, a London-based director of fixed income at Franklin Templeton, who reckons the Reserve Bank of Australia won’t raise the cash rate from its current 1.5 percent. In contrast, the money manager expects at least three rate increases by the Federal Reserve in 2018.

“The RBA is going to be slower to raise rates than other economies -- the U.S. in particular,” Beck said in a telephone interview during a trip to Sydney. “We prefer Aussie bonds over U.S. bonds.”

Beck’s view on the RBA is in contrast to swap traders who are pricing in about a 60 percent chance the central bank would hike rates in December. RBA Governor Philip Lowe said last week that he doesn’t yet see “a strong case” for a near-term interest-rate adjustment. He did say he expects progress on reducing Australia’s jobless rate and moving inflation to the mid-point of its 2 percent to 3 percent target. If that happens, “at some point it will be appropriate for interest rates in Australia to also start moving up,” he said.

Read more: Powell suggests Fed will go ahead with rate hikes

Franklin Templeton’s investment strategies haven’t changed course despite the recent volatility that spooked equities markets from the U.S. to China, Beck said.

Here are Beck’s views on where the Australian dollar will trade this year:

• Sees Aussie’s current level of 78.6 U.S. cents “upper end of the band” for 2018
• “I’m not sure we’ll see the Aussie significantly above 80 U.S. cents.”
• NOTE: The Australian dollar has appreciated 2.5 percent against the U.S. dollar in the past year

To contact the reporter on this story: Ruth Carson in Sydney at rliew6@bloomberg.net.

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum

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