Further interest rate pain on the cards


The Reserve Bank will persist in raising rates in the second half of 2023.

Australians can brace for further interest rate increases in the second half of the calendar 2023, says Mishan Dahia, Investment Analyst of the asset consulting firm Atchison.

“The Reserve Bank will persist in raising rates in the second half, with each month being actively monitored for potential changes as both headline and core inflation moderate downward, bringing with it significant hardship to many Australian mortgage holders transitioning from fixed to floating rate loans.

“It means the reduction in disposable income will be substantial, due to both the rate of adjustments and the cumulative effect of previous rate increases, that have not yet been transferred to borrowers.”

“The silver lining is the labour market that has improved slightly in recent months, leading to an exceptionally low unemployment rate.”

In the June 2023 quarter, the annual CPI (consumer price index) was six per cent, below the seven per cent increase in the March 2023 quarter. This represents the second consecutive quarter of declining annual inflation following the peak of 7.8 per cent in the December 2022 quarter.

But Dahia remains unconvinced that falling inflation means the end of interest rate rises in the immediate future. “The target CPI range is between two-three per cent, and strong jobs data in June (double that of expectations), as well as a tight labour market, suggests the Reserve Bank will err on the side of caution and lift rates again to drive inflation down.

“Although it is predicted that the headline inflation number will drop to 4.5 per cent by the end of this year and continue declining to 3.1 per cent by December 2024 – within striking range of target CPI – it is likely that it will consider higher interest rates essential to achieve this outcome.”

Dahia says that Atchison expects the Australian economy to grow at a slow rate, with corporate earnings put under greater pressure in the face of persistently high inflation and higher interest rates.

“But despite these headwinds, we are still long Australian equities and feel comfortable holding quality names at the right valuation.”

Globally, Dahia expects China’s economic recovery to persist, albeit unevenly, with investment and industry experiencing slower progress. “Consequently, our GDP growth forecasts for China in 2023 range between four-five per cent.

“One bright spot is Japan, where equities could continue outperforming as the country moves out of deflation and transitions to a mildly inflationary economy. In addition, the Bank of Japan is moving much slower on monetary policy normalisation than other central banks.

“Although Japanese equities have recently surged to post-bubble highs, the outperformance appears sustainable off the back of the Tokyo Stock Exchange’s call earlier this year for companies to focus on sustainable growth and enhancing corporate value. This call was particularly directed at companies with a price-to-book ratio of below one.”

He expects US growth to moderate in the second half of 2023, despite the current bullish outlook from investors following the hype about AI.

In the second quarter, the US stock market continued its upward trajectory, with approximately 75 per cent of the overall gains attributed to the returns of only seven companies. Year to date, and as of the 30th of June 2023, the seven companies driving the Nasdaq include NVIDIA +196 per cent, Meta +130 per cent, Tesla +142 per cent, Amazon +52 per cent, Apple +55 per cent, Microsoft +42 per cent, and Alphabet +34 per cent. 

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