Today, Australian borrowers cheered as the Reserve Bank of Australia (RBA) cut the official cash rate by 0.25% to 3.85%.
This was not a huge surprise. Most economists expected a rate cut; the only disagreement was regarding the magnitude.
Many forecasters are predicting more rate cuts to follow. The money market is pricing one or two more rate cuts in 2025, which would bring the cash rate down to around 3.5%. Judo Capital Holdings Ltd (ASX: JDO) Economist Warren Hogan recently authored an opinion piece in the Australian Financial Review, where he offered an alternative view.
According to Hogan:
With underlying inflation still running at the top of the target band and the private economy showing signs of gradual recovery in late 2024 and early 2025, there is no strong case to take policy into a genuinely stimulatory stance.
As Hogan points out, recent data indicates ongoing inflation pressure and strong demand for labour.
In April, the headline Consumer Price Index (CPI) came in at 2.4%, according to the Australian Bureau of Statistics. However, the trimmed mean (which excludes the more volatile food and energy components) rose to 3.2%, which sits above the RBA's 2-3% target range.
On the labour side, the jobs market remains strong. The unemployment rate remained steady at 4.1% in April. This came after 89,000 people found work in April, beating expectations for modest gains of 22,500. During the month, the participation rate also increased to a three-month high of 67.1%, and full-time employment hit a new record high. A stronger labour market increases the possibility that inflationary pressures could re-emerge.
As reported by the Australian Financial Review, RBA governor Michele Bullock acknowledged in April that the jobs market was still tight, which could make it harder to sustainably restore inflation within the RBA's 2-3% target band.
Governor Bullock said:
We don't have to be in the target range to cut rates, but there are some risks on the upside and the labour market is one of them. Not everyone agrees, but we still think there's tightness in the labour market.
On this basis, Hogan suggested:
In the absence of a tariff-induced global shock, we are unlikely to see any more cuts after that. Indeed, the natural rhythm of the economic cycle suggests rate increases could be back in play before too long.
While Hogan's view certainly doesn't match consensus, his contrarian views have proven correct in the past.
When it comes to predicting interest rates, Hogan's track record speaks for itself.
In 2023, he was the nation's top economic forecaster. In the Financial Review's annual ranking of economists in 2023, he was the only analyst to accurately predict the RBA would raise the cash rate five times to 4.35%.
Picking stocks purely based on macroeconomic forecasts is rarely a sound strategy. Business fundamentals should always come first. However, some degree of portfolio management tailored to the macroeconomic environment can improve returns. In this case, those who see some merit in Hogan's view may wish to maintain a more balanced portfolio until the RBA's trajectory becomes more certain. This may involve balancing interest rate-sensitive stocks such as the Commonwealth Bank of Australia Ltd (ASX: CBA) with consumer discretionary stocks that would benefit from rate cuts, such as JB Hi-Fi Ltd (ASX: JBH).
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