Despite five interest rate hikes from the Reserve Bank of Australia (RBA) in 2023, the S&P/ASX 200 Index (ASX: XJO) closed the year up 9.3%.
And that's not including the dividends many ASX 200 companies pay out to their shareholders. If we add those back in the annual gain is right about 13.9%.
It makes you wonder how well the Aussie stock market may have fared if instead of hiking rates, the RBA was bringing them back down.
As you may recall, we entered 2023 with the official cash rate at 3.10%. That was already up from the rock bottom low of 0.10% on May 2022, when the central bank first began to tighten the monetary screws to combat soaring inflation.
At its first meeting of 2023, on 8 February, the RBA raised interest rates by 0.25% to 3.35%. And the ASX 200 finished the day down 0.5%.
Today, the official cash rate stands at 4.35%.
So, will interest rates go higher yet from here? Or can ASX 200 investors look forward to some rate-cutting relief from the RBA in 2024?
What can ASX 200 investors expect from interest rates in 2024?
There are numerous reasons why higher interest rates throw up headwinds for most ASX 200 shares.
Among them, companies face higher borrowing costs. And as the cash rate goes up, so too does the appeal of low-risk bank deposits, which tend to draw money out of stocks.
With that said, here are some expert forecasts on when ASX 200 investors might see the RBA reverse course and begin easing (courtesy of The Australian Financial Review).
Now, as you'd expect, there's no solid consensus on the timing. Although the median forecaster in an AFR survey of 40 economists is pencilling in the first interest rate cut from the RBA in September 2024.
Moody's senior economist Katrina Ell counts among those tipping September will see the first month of easing from the central bank. However, she noted that surging immigration levels are adding to inflationary pressures in the jobs market.
"If inflation and the labour market stay too warm for comfort, that rate cut path will unquestionably be pushed out," she said.
Alexis Gray, a senior economist at Vanguard, believes ASX 200 investors, and mortgage holders, should see the first relief from the RBA in H2 2024.
According to Gray:
We expect rate cuts to commence in the second half of 2024, as the bank will, by then, have successfully put inflation back on a path to target and that a weakening economy will risk pushing inflation below target, justifying rate cuts.
Some economists, like MLC chief economist Bob Cunneen, forecast a more rapid retreat in inflation than the RBA is expecting. He thinks this will see the central bank cut rates in May.
"RBA will start cutting interest rates in May 2024 after the March quarter CPI confirms a sharp descent in headline inflation below 4%," he said.
Rate cuts not locked in
But there are no guarantees ASX 200 investors will see interest rates come down in 2024.
In fact, we may yet be in for another hike.
"We expect the RBA to hike, with the key driver being the still-sticky rate of domestic services inflation," Jarden chief economist Carlos Cacho said (quoted by the AFR).
Challenger chief economist Jonathan Kearns also cautioned that rising wages and other persisting inflationary pressures could lead to a rate hike next month.
"Whether the RBA will have the confidence to raise rates in February or will be swayed by expectations that other central banks are going to be easing, is a critical question," he said.
