Buying S&P/ASX 200 Index (ASX: XJO) shares and hoping for Reserve Bank of Australia (RBA) interest rate cuts in 2024?
You're not alone!
It's hard to believe that less than two years ago, in early May 2022, the official RBA interest rate stood at a rock bottom 0.10%. And over the prior months, some analysts were even forecasting that Australia's central bank could join its European counterparts and delve into negative interest rates.
How that would have turned out, we'll never know.
What we do know is that the massive fiscal and monetary stimulus measures pushed through during the COVID pandemic scare stoked what had been labelled 'stubbornly low' inflation levels. Inflation down under topped out at a blistering 7.8% in December 2022.
To combat that suddenly resurgent inflation, commencing in May 2022, the RBA hiked interest rates at 10 consecutive monthly meetings.
With three more rate increases over the next eight months, Australia's official cash rate reached the current 4.35% on 8 November.
The question ASX 200 investors are asking now is, when can the market expect the central bank to begin easing?
Might the next RBA interest rate cut not come until 2025?
Under the new reporting schedule, RBA governor Michele Bullock will announce the bank's next interest rate decision tomorrow at 2:30pm AEST.
Now only a few optimistic investors are expecting the central bank to cut rates this month.
According to the ASX interest rate indicator, 95% of investors expect the bank to hold rates at 4.35%.
But the market continues to expect one or more RBA interest rate cuts in 2024.
Expectations are high for a 0.25% cut in September, with many investors also pricing in a second reduction in December bringing the official cash rate to 3.85% heading into 2025.
But not everyone is looking through the same rose-coloured glasses.
HSBC chief economist Paul Bloxham believes ASX 200 investors awaiting interest rate relief will need to be patient and await 2025.
According to Bloxham (quoted by The Australian Financial Review):
Although the RBA is patiently seeking to bring inflation down gradually, so as to maintain as close to full employment as possible, fiscal policymakers may not be so patient given the electoral cycle.
Personal income tax cuts are already locked in for July 1, but more spending is a risk in the May budget, with both likely to support inflation, at a time when it is already above target.
Then there's the blistering Aussie housing market.
"We see the RBA as unlikely to want to cut rates when the housing market is so tight and housing prices are rising solidly, for fear of pump-priming and driving a further housing price boom," Bloxham said.
Keep your eyes on the horizon
We may see the first RBA interest rate cut in September, and perhaps a second cut in December.
Or we may need to await 2025 for some rate relief.
Either way, ASX 200 investors will do well to keep one eye on the horizon and the other eye peeled for quality companies operating in growing markets that may have been unduly oversold due to market angst over sticky inflation.
As legendary investor Warren Buffett famously advised, "Embrace what's boring, think long-term, and ignore the ups-and-downs."
