WEEKLY E-MAIL

19 February 2024

ARE INTEREST RATES ON THE MOVE AGAIN?

By James Malliaros

After one of the fastest interest rate hicking cycles on record over 2022 and 2023, most Central Banks around the world have now signalled an end to interest rate rises, provided inflation doesn’t re-accelerate this year. In fact, they have actually gone a step further, having changed their view of higher rates for longer, to potential rate cuts over the course of 2024.

According to financial markets, it is probable that rate cuts in the USA will happen sometime mid-year, however the amount and timing are still very uncertain and are dependant on the trajectory of inflation and the health of the US economy. The US Federal Reserve (Fed) left rates unchanged at its most recent meeting in January and signalled that a rate cut is unlikely in March, stating it does not intend to lower rates until inflation is trending towards its 2% target.

Although the US Fed is projecting the headline inflation rate to hit 2.40% by the end of 2024, things hit a road bump recently with the January CPI (inflation rate) coming in higher than expected at 3.10%, adding further weight to the argument that The Fed needs to keep rates high for some months yet.

US Fed interest rate cummulative cuts by December 2024

In Australia, there is still more work to be done on the inflation front before any rate cuts occur, however financial markets are pricing in cuts at the back end of this year, about 6 months later than the USA. The Reserve Bank of Australia (RBA) is currently forecasting headline inflation to hit 3.50% by the end of 2024, 3.00% by the end of 2025 and not come to target (2.50%) until mid-2026 given the unique challenges to inflation within the domestic economy, such rent/housing and sticky wage and services inflation.

As far as financial markets are concerned, 2024 looks to be a year of interest rate easing across most of the developed countries such as the USA, EU, UK and Australia, with the overall trend to lower inflation still intact. However, the sugar hit from lower oil prices and improved supply chains we saw late last year is now entering a period of more balanced risks.

With inflation falling, the Fed is expected to cut interest rates four times this year (total 1.00%) and the RBA three times (total 0.75%), with further rate cuts not until 2025.

As such, with inflation falling and interest rates coming down, shares can potentially trade on higher earnings multiples than otherwise and real assets, like property, perform much better in a lower rate environment.

James Malliaros
Senior Financial Planner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

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