Steve Campbell: No rate cuts – or rises – in 2024?

While investors expect rate cuts offshore next year, Pendal’s head of cash strategies Steve Campbell sees our cash rate unchanged in 2024.

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AUSTRALIAN mortgage-holders were spared further pain this week when the Reserve Bank left the cash rate unchanged at 4.35%.

The decision was in line with market expectations, which had a rate hike at around 5% probability.

In its statement, the RBA retained a tightening bias against a background of much uncertainty.

Domestically, total household consumption has been sluggish, though the distribution is uneven.

Some households have benefitted from rising house prices and interest income, while others have struggled from higher interest costs and negative real wages.

Much like the experience globally, goods inflation is declining while services inflation remains too high and persistent.

The RBA was a reluctant hiker in November, boxing itself into a corner with a low tolerance for higher inflation — which ultimately proved the case following the release of the third-quarter inflation number in late October.

Since the November RBA meeting there’s been no smoking gun to warrant further policy-tightening — in fact, it was quite the opposite if we look at offshore markets.

Bond yields rallied aggressively in November, largely unwinding the carnage that bond investors experienced in preceding months.

In the United States, the short end rallied by around 50 basis points. The market is now looking for the US Federal Reserve to ease monetary policy by more than 1 per cent in 2024.

Market pricing also has the European Central Bank, Bank of England and Bank of Canada easing multiple times.

So, where to from here?

The RBA

The next RBA meeting in early February will be influenced by fourth-quarter inflation data released in late January.

We expect Q4 headline CPI to come in around 0.8%, taking annual headline inflation rate to 4.2%.

The RBA’s forecast for 2023 annual headline inflation is 4.5%.

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We can’t see how the RBA can achieve its 4.5% forecast — and 0.3% would be a considerable miss.

If we’re right, talk about Australian rate cuts in 2024 will gather momentum.

That would be getting ahead of things.

The RBA hasn’t been as aggressive in hiking and was slower than other central banks to move.

Inflation is likely to come down to 3.5% in 2024. But unless we see significant weakness this will remain too high to warrant a rate cut.

We therefore see the central bank leaving the cash rate unchanged over 2024.

Though this won’t stop the market periodically pricing rate cuts in — opening opportunities to trade duration with a long bias into early 2024.

About Steve Campbell and Pendal’s Income and Fixed Interest team

Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.

Find out more about  Pendal’s cash funds:

Short Term Income Securities Fund
Pendal Stable Cash Plus Fund

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here