The next interest rate move will be down, but the US will beat us to it

Even though our Cup Day rate hike was a mistake, the US is likely to beat us to the next move - which will be down.

US Federal Reserve Chairman Jerome Powell.

Yes, rate hikes are over for now – on both sides of the Pacific. Wall St’s 500-plus point surge, and our own 100-plus point leap, shouted that most enthusiastically.

We could also add New Zealand, the European Central Bank and the granddaddy of them all, the non-gender specific Grey Lady of Threadneedle Street, the Bank of England, to that.

But that does not mean we now swing, far less seamlessly and quickly, to rate cuts. Even though the Fed is now “predicting” three rate cuts in 2024.

The word “predicting” is in quotation marks because the Fed itself most certainly does not predict, far less promise, what it will do into the future.

It’s what the Fed members, surveyed, believe most likely.

And the record shows, they ain’t that good at forecasting the future, even a future that should essentially be made by them.

Now, as I argued the other day, in pure reason, our Reserve Bank should probably be considering a rate cut as early as its next meeting at the start of February – on the basis that the Cup Day hike was clearly unnecessary and arguably a mistake. So a February cut would simply undo that.

But that’s – most – unlikely, absent something seriously unpleasant surfacing over the next two months.

And absent that sort of “reversal” an earlier rate cut is more likely on the other side of the Pacific.

For starters the Fed went higher and faster: Its rate is 5.25 to 5.5 per cent, our RBA’s is just 4.35 per cent.

Secondly, their inflation has come down faster and further than ours.

It’s at 3.1 per cent, ours was at 5.4 per cent.

Indeed, we still have a negative real interest rate, the US is strongly positive in real terms.

That said, inflation in Australia will be under 5 per cent over the December year; it could be in the low-4s.

The better place both the Fed and the US economy are in, relative to us, is the way the US economy operates so dramatically more flexibly than ours – especially on wages and jobs and energy.

So, through 2023 we did see – as I suggested at the start of the year was likely – something of a Goldilocks mix emerge in America.

We saw sharply falling inflation, but without the economy spiralling into recession, and corporate profits staying strong – the perfect recipe to send Wall St up, and it did.

Our derivative market followed suit; especially this Thursday.

So into and through 2024, it will continue to be the case that US rates and the US economic mix will be determinative of our market.

Normally I would suggest that our rates would only start to go down on the back of a sharply slowing economy and inflation falling more rapidly than anticipated, at least by the RBA, towards 3 per cent.

But the problem is wages and sticky services inflation combining to threaten locking us into a 3-5 per cent inflation range.

Worst case would be to actually force the RBA into hiking into a clearly slowing economy.

Originally published as The next interest rate move will be down, but the US will beat us to it