Interest rates have been a major topic of conversation this week.
There were hopes that the Reserve Bank of Australia (RBA) could be cutting rates as early as next month.
This would have been a big boost to homeowners, who are seeing their disposable income squeezed by higher mortgage repayments
Unfortunately, due to the release of recent economic data, the market is now almost entirely ruling out an RBA rate cut this year. Instead, it believes that borrowers will have to wait until May for some relief.
But not everyone agrees that the first cut to interest rates will come in May. One leading broker believes that it will be sooner than that.
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When will the RBA cut interest rates?
Commenting on the market's expectations, Bell Potter said:
After stronger-than-expected labour market data last week, the market is now pricing a full rate cut by May 2025. This has been a significant shift from the market, which expected rate cuts to begin in 2024 only a few months ago. While the headline employment data remains strong, several factors suggest this strength may not hinder disinflation.
We believe the primary drivers of inflation in the current cycle have been transitory factors, such as global energy prices and pandemic-related imbalances (easy fiscal and monetary policies, supply chain issues), rather than wage growth (labour market tightness) alone. These factors are now receding.
In light of the above, the broker believes that the RBA may be in a position to cut interest rates in February. While this is later than many would have hoped, it certainly is better than waiting until May. It explains:
Slowing economic growth, a softer private sector labour market and slowing (potentially flatlining) rental inflation should keep inflation moving sustainably towards the RBA's band by the end of the year. This will likely enable the RBA to start cutting rates in early 2025, with February our base case.
Where should you invest?
If you are looking for investment opportunities for when interest rates fall, Bell Potter thinks there could be some good options in the retail sector. It said:
Domestic consumer stocks should benefit the most from RBA rate cuts in terms of earnings. While these stocks have already rallied in anticipation of RBA rate cuts, we still believe there are pockets of value in the retail sector as there is a risk of earnings upgrades over the next 12 months, especially if rates are cut in February 2025.
It has suggested that Eagers Automotive Ltd (ASX: APE) and JB Hi-Fi Ltd (ASX: JBH) could be worth considering.
