As we touched on earlier, the Fed is set to fall off the pace of rate cuts this year, removing a tailwind for its high-flying stock market:
- The RBA is forecast to cut interest rates 3-4 times, up to 1% in total through 2025.
- The Fed is forecast to cut interest rates 1-2 times, up to 0.5% in total through 2025.
- The European Central Bank (ECB) is forecast to cut interest rates 3-4 times, up to 1% in total through 2025.
We feel this comparative market positioning is on point, but central banks are likely to be cautious as they wait to see how inflationary Trump’s policies really are, i.e., the RBA cuts three times and the Fed once. However, we should be conscious that falling rates while the economic backdrop remains solid is the ideal scenario for stocks.
The Bank of England (BOE) has cut interest rates 3x in the last 6 months, in step with the Fed, while Michele Bullock et al. have sat on their hands. However, we must highlight that the RBA didn’t raise rates as far through the painful 2022/3 hiking cycle to rein in inflation, and they must now weigh up the inflationary pressures of government giveaways into this year’s election. The RBA and BOE cash rates look on track to test the 3.5% area over the next year, while the ECB rate could fall below 2%. However, last week saw Euro-area inflation unexpectedly accelerate, supporting the ECB’s cautious approach to lowering interest rates while the spluttering economy faces intensifying trade threats from the US; the decline was mainly down to cars and machinery.
- We expect major central banks to cut rates in 2025, but inflation concerns will likely disappoint dovish pundits.
