Cuts in Australian interest rates and when these are likely to take place have been a topic of much discussion between analysts and investors this year.

Until inflation, as measured by the Consumer Price Index (CPI), is brought into the Reserve Bank of Australia’s (RBA) target band of 2 – 3%, uncertainty and speculation in the interest rate outlook will persist. This is not helped by inflation proving to be “sticky,” not falling fast enough to allay the RBA’s concerns.

The last quarterly inflation reading was 3.6% in April 2024, with the next report on 31 July 2024, and many hoping a further fall in inflation will be enough for the RBA to signal its intentions regarding lowering interest rates.

High interest rates negatively impact the economy. Projects get delayed, new business ventures are put on hold and overall economic activity slows down. In particular, retail sales have been impacted for several months now, falling 0.4% in March 2024 (seasonally adjusted) caused by consumers tightening their wallets as higher interest rates bite into their disposable income. If this slowdown runs too deep, a recession is possible. Something the RBA wishes to avoid as it treads a narrow path toward taming inflation without damaging the economy.

Australia’s big four Banks (CBA.AX, WBC.AX, ANZ.AX and NAB.AX) are all forecasting a rate cut this year, possibly in November 2024. The rate cuts cannot come soon enough for many consumers and businesses.

VectorVest has the tools to help its subscribers cut through the noise in the media, enabling them to deal with the relationship between inflation, interest rates and company earnings (earnings, of course, are the driver of share price performance). The graph format of these tools is found by clicking on the Graphs tab on the main toolbar of VectorVest, then clicking on the drop-down selection on the top left of your screen and select Market Climate Graph.

On your graph, add in CPI (inflation) and T-Notes and T-Bills (long and short-term interest rates) by clicking on Add Parameter on the right-hand side of the graph and select accordingly. Make sure you tick the box next to each indicator once you have added them to your graph layout.

As interest rates have risen (as shown by T-Notes and T-Bills), note how inflation has started to come down.  Finally, add in our Earnings Trend Indicator (ETI). The ETI is on a scale of 0.00 to 2.00. An ETI score below 1.00 means that the overall trend on earnings is falling across the All Ordinaries, and above 1.00, earnings are rising.

Rising interest rates are bringing inflation down towards the desired 2 – 3% band, but a falling ETI shows this is coming at a cost to consumers and businesses. The challenge for the RBA is to bring inflation back down without stalling the economy too much.

We encourage you to look at VectorVest’s Market Climate Graph regularly to watch the macro picture as it unfolds.

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