Commonwealth Bank shares hit new high as rate cut bets fuel market rally

Commonwealth Bank shares hit a record on Thursday and are on track to gain 11 per cent this year, as markets rallied on bets of interest rate cuts by central banks next year.

Commonwealth Bank shares reached a record on Thursday and are on track to gain 11 per cent this year, as markets rallied on bets of aggressive interest rate cuts by central banks in 2024.

CBA shares closed on their high for the day at $112.29, up 0.9 per cent, as investors bet the nation’s largest lender is well placed to benefit from a string of rate cuts expected in the second half of 2024.

The jump outperformed the wider Australian benchmark, which rose 0.7 per cent to be just 18 points away from its August 2021 record, when ultra-low interest rates were still the norm in the wake of the Covid pandemic.

Banks have benefited greatly from the rapid rise of interest rates, with the Reserve Bank increasing the base rate from near zero to 4.35 per cent via 13 increases since May last year.

Hardship levels are rising among the most vulnerable borrowers, but thanks to those rate rises, interest income has skyrocketed at the banks while strong employment and a big savings buffer have kept overall bad debts below historical levels.

A cut to the cash rate by the RBA in the new year will give banks an opportunity to reprice mortgages and deposits in strategic ways that increase their margins.

Economists at the Commonwealth Bank are forecasting the RBA will cut the cash rate by 75 basis points, likely starting from September – which would see base rates fall from 4.35 to 3.6 per cent.

Cheaper borrowing costs can also drive credit growth as people can afford larger home loans.

Economists have warned, however, that the economy remains at risk of a recession, and with services inflation still high the RBA could keep rates higher for longer and until it achieves its inflation target.

CBA has the largest market share of Australia’s home loan and deposit markets, and Thursday gains outperformed its smaller peers. Westpac shares rose 0.57 per cent, NAB gained 0.72 per cent, while ANZ gained 0.62 per cent.

Since the US Federal Reserve earlier this month pivoted its hawkish messaging and signalled it would be cutting rates next year, optimism has inebriated investors, who previously factored in interest rates staying higher for longer.

Money markets are pricing in at least six interest rate cuts from the Fed in 2024, and at least two in Australia by next December.

The rally also propelled shares in iron ore miners BHP (0.9 per cent), Rio Tinto (0.8 per cent), Fortescue Metals (2 per cent), and Champion Iron (3.6 per cent) to record highs on Thursday.

Online real estate agent REA Group and mining and media conglomerate Seven Group also reached new highs, jumping 1.09 per cent and 1.8 per cent higher respectively.

The Aussie sharemarket is also on track for its biggest monthly gain since November 2020 and the sharpest December rally in three decades, as investors expect deep interest rate cuts to fuel returns.