S&P/ASX 200 Index (ASX: XJO) investors positioning for interest rate cuts in 2024 may be getting ahead of themselves.
In its battle to tame rocketing inflation, which topped out near 8% in December 2022, the Reserve Bank of Australia (RBA) has raised the official interest rate from a rock bottom 0.10% in May 2022 to the current 4.35%.
At its most recent meeting on 19 March, the RBA opted to keep rates on hold. The central bank noted that while inflation in Australia continued to moderate, "the outlook remains highly uncertain".
At the time, I wrote, "ASX 200 investors hoping for a return to the 0.10% cash rate of early 2022 will likely be left wanting for a long time."
Now, a month on, it looks like investors hoping for even a small interest rate reduction from the RBA might not see that until 2025 or beyond.
Here's why.
Should ASX 200 investors prepare for an RBA interest rate hike?
Analysts remain divided on whether the RBA could pull the trigger and lift interest rates to finally bring sticky inflation under control.
And the issues facing ASX 200 investors run wider than just what's happening with Australia's economy.
As James Knightley, chief international economist at ING in New York, explains (quoted by The Australian Financial Review), "The Fed's inflation problems have a global dimension, and other central banks cannot ignore them."
Knightley added, "In particular, if the Fed can't cut rates soon, it could stoke up dollar strength, which causes stress for the European economy and constrains other central banks' ability to cut rates."
Indeed, bond markets are increasingly pricing in the odds that the RBA will hike interest rates next rather than cut them.
According to Fortlake asset management co-founder Christian Baylis (quoted by the AFR):
When you compare Australia to other economies, they are much closer to their neutral real level with their policy rates of 5% and inflation around our level. This means the RBA ultimately has more to do. I think three rate hikes at the minimum, as we are getting more inflation symptoms, not less.
Baylis believes there's an even chance the RBA will boost the official cash rate when the board next meets on 18 June.
Tightening risks are growing for ASX 200 companies
AMP Ltd (ASX: AMP) chief economist Shane Oliver still expects the RBA to begin easing in 2024. However, the changing economic outlook has increased the risks of the bank moving to tightening.
That could throw up some unwanted headwinds for ASX 200 companies, particularly those carrying significant debt loads.
According to Oliver:
The combination of sticky services inflation will leave the RBA cautious and still waiting for greater confidence that inflation will return to target in a reasonable time frame and it's likely to signal this at its May meeting.
The RBA will likely also debate whether another rate hike is needed. We don't think it will be or that the RBA will hike again, but it is likely to reinstate its tightening bias, and another rate hike is now a high risk.
Coming in with one of the more hawkish forecasts on what ASX 200 investors can expect from interest rates is Judo Capital Holdings Ltd (ASX: JDO) chief economic adviser Warren Hogan.
Hogan forecasts three rate hikes this year, taking the cash rate to 5.1% heading into 2025.
"Everything points to the fact that 4.35% isn't the right level for the cash rate," Hogan said (quoted by the AFR).
Hogan said that Australia's cash rate was below the 5% plus levels of countries like the United Kingdom, the United States, Canada and New Zealand:
The RBA's strategy this cycle doesn't seem to be working.
They were hoping we could do less than the rest of the world because we were more exposed to the nominal channel of monetary policy through variable rate mortgages … We just need to now get up to the level that other countries are, at 5%.
Addressing the so-called narrow path to a soft landing, he added, "It looks like we're wandering off the narrow path, and it's not playing out to plan."
Of course, not everyone believes the RBA will lift interest rates from here.
"Despite some market jitters, in my view, any monetary tightening is in indefinite abeyance, and the next move in the policy rate is a cut," Stephen Miller, Paul Keating's former advisor, said.
