Mid-2023 end to rate rises?

Mike Taylor

Managing Editor/Publisher, Financial Newswire

9 January 2023

Global investment manager, Janus Henderson is predicting the worst may be over for interest rate rises by the middle of the year.

In an analysis issued last week, the investment manager said its base case had the Reserve Bank of Australia (RBA) tightening by 0.25% in February and then pausing before delivering a late tightening cycle 0.25% “inflation insurance” move in May.

It said this would take the cash rate to a moderately restrictive 3.6%, making the current tightening cycle the largest and fastest in the monetary policy inflation targeting era.

“By mid-2023, almost a year after the first tightening, we expect to see more definitive signs of the economy responding to monetary policy’s long and variable lags. The overall profile for growth over 2023 is one of deceleration rather than outright recession. That said, the risks are tilted to the latter given the uncertain paths for the Ukrainian War, energy prices and offshore central bank tightening.”

“While we do not see the conditions in place for monetary easing in 2023, the window opens for the RBA to take its foot off the monetary brakes over 2024 provided core inflation eases in response to a period of sub trend growth. After pricing in a cash rate peak closer to our profile in early December, market pricing has pivoted back to a 4% cash rate peak later in 2023 and 4.4% long-run cash rate (using the 8-year rate 2-years forward as a proxy). In our view such a cash rate is more in line with a cyclical peak rather than the ‘new’ long-run normal cash rate. Accordingly, we see the recent lift in yields as beginning to restore value.”

“In navigating the environment ahead, investors should be on the lookout for improved compensation for risk as monetary policy tightens further. We observe that the repricing across different pockets of credit and risk premia have not been simultaneous, providing outperformance opportunities through active rotation,” the Janus Henderson analysis said.