Why interest rates could stay ‘higher for longer’

FOR ADVISERS ONLY

With petrol prices still pushing up inflation in the economy, it’s possible that interest rate cuts could still be a long way off, according to ClearView’s Chief Investment Officer.

As the Reserve Bank held rates at 4.1 per cent for the fourth month in a row after its October meeting, market speculation is that rate hikes may be over for 2023 at least.¹

But in his recent CIO Insights webinar, ClearView Chief Investment Officer Angus Sippe suggested the central bank may still have further to go with interest rates, which could also be left “higher for longer” going into 2024.

“Our base case is higher for longer with central banks, with maybe one or two more hikes,” Mr Sippe said.

He added that interest rates could be “either a correlation or causation” with inflation, as it appears they were used to fight inflation but may have caused further inflation at the same time.

“The biggest factor in [inflation] is interest rates – if rates move higher that leads to higher inflation. It does go a long way to explaining it and goes to show maybe the trajectory is for higher inflation going forward.”

Mr Sippe suggested another key factor continuing to drive inflation was petrol prices, which had jumped in recent weeks to over $2 a litre in Australia, driven by restricted supply and increasing demand for oil in the US.

“At the end of June petrol prices had a minus 20% impact [on inflation], and by the end of August it was a plus 20% impact,” he said.

“Crude oil production is at the lowest point it’s been the last 20 years, and it’s also moving negative on a 12-month basis. Reduced supply will add to price pressure at the same time as the US have to increase the supply [of their] strategic petroleum reserve.”

Mr Sippe said the US petrol reserve, which was released at times of stress, had been almost run dry to deal with price shocks since Russia invaded the Ukraine.

“We are at the point where the inventory of oil in the US is as low as it’s been since 2014, so the US is going to have to start buying in more oil to re-stock their structural supply,” he said.

“This means that inflationary pressures are continuing to come through and not only pressure the consumer but corporate margins.”

With other global central banks “firing warning shots” that interest rates will stay high, Mr Sippe said inflationary pressure could remain in the economy and push growth into negative territory.

“Our base case continues to be for a drawn-out downward contraction,” he said.

“We think the US and the rest of the world will join the Eurozone in recession in Q4, maybe even Q1 if things are delayed into next year.”