Posted by on
07/05/2024
As we move further into 2024 the conversation in financial markets has turned from “rate cuts soon” to “higher for longer”. Back in January, the futures market had seven rate cuts (yep, you read that right) priced in for 2024 in the United States. Here in Australia the markets had a more modest 2 rate cuts priced in. Those aggressive predictions have now fallen to fewer than 2 cuts in the United States, and no cuts at all in Australia this year!
So why the change? There are two main reasons. Firstly, the US economy is doing much better than anyone expected, and has for months defied predictions of imminent recession to keep on growing at a strong pace. The second reason is that inflation has proven to be more stubborn than many analysts had expected, especially in the services sector of the economy where the cost base of firms is dominated by briskly rising wage rates.
Strong growth, very low rates of unemployment and persistent inflation in services industries has prompted economists and traders to revise their expectations of how much monetary easing central banks can feasibly deliver in 2024. Here at Rabobank we have recently revised our forecast on the RBA cash rate to include two more rate hikes this year, and no cuts either this year or next. We’re a bit of an outlier in projecting further hikes, but it’s fair to say that markets are coming around to a consensus view that interest rates are likely to stay ‘higher for longer’. That is not the news that borrowers would have wanted, but it should be music to the ears of people who have surplus savings to deploy.
Term deposit rates had fallen slightly over the last six months or so (as predicted in my last article!) as market-traded interest rates fell to reflect expectations of imminent rate cuts. With those expectations now changing, we are seeing the benchmark rates that reflect the price banks have to pay to borrow from each other creeping higher. Those benchmark rates are still a long way below the levels that we saw in late October, but if the market comes around to our way of thinking about the RBA delivering two more rate hikes, those benchmark rates will likely climb further.
If that happens, we could see term deposit rates push higher again as banks compete to secure funding outside of the wholesale money markets. In even better news for savers, the spread between available term deposit rates and the inflation rate continues to widen, so it is possible to get attractive real returns on investment after the effects of inflation are taken into account. For many savers, the prospect of attractive returns on bank deposits will be a welcome change after years of savers having to move higher up the risk curve in search of yield.
This communication is sent by Rabobank Australia Limited ABN 50 001 621 129 AFSL 234700. The statements made and opinions expressed within this document are reasonably held based on the information available at the time of publication. Rabobank does not guarantee the accuracy or completeness of the information published within this document.