Higher-for-longer interest rates are likely to remain central banks’ main strategy for the rest of this year, the CEO of a leading financial advisory and fintech has warned.
Equities fell and Asian bonds tumbled on Wednesday as US Treasury yields surged overnight, compounded by hawkish comments from a Federal Reserve official, dampening risk sentiment.
Minneapolis Fed President Neel Kashkari indicated that policymakers have not fully dismissed the possibility of further rate increases, despite the current restrictive policy stance.
“The base case for central banks’ main strategy for the rest of 2024 will be to stick with ‘higher-for-longer’ rates, unless the global economy experiences a significant downturn,” said deVere Group’s Nigel Green.
“This stance is driven by the need to curb sticky inflationary pressures, making rate cuts a harder decision for the foreseeable future.”
Green explained that in the U.S., the Federal Reserve is facing an economy that is not cooling off as much as desired.
“Recent hawkish remarks from a Fed official have dampened market sentiment, reinforcing the belief of many analysts that rate cuts are off the table for this year.
Cautious Fed
“The Fed’s cautious approach is rooted in the need to ensure that inflationary pressures are firmly under control before considering any reduction in interest rates. This means investors should prepare for a prolonged period of elevated rates, which will impact various asset classes differently,” he noted Green.
Similarly, the Bank of England (BoE) is unlikely to cut interest rates in the near term, partly due to the upcoming general election.
“Political considerations often lead to a more conservative approach to monetary policy, to avoid any potential economic turbulence that could influence election outcomes.
“Investors should note that the Bank’s likely decision to maintain higher rates can be expected to affect sectors sensitive to borrowing costs, such as real estate and consumer finance,” he affirms.
Over in Europe, the European Central Bank is in a slightly different position, the deVere CEO explained, adding that, “with inflation showing signs of slowing, the ECB does have room to ease monetary policy.
“However, key policymakers have indicated that any rate cuts will be gradual and measured. The ECB has signalled a potential rate cut for June 6, but beyond that, expectations have been tempered with the likelihood of just one more cut this year.”
Australia unique
Australia presents a unique case where inflationary pressures have unexpectedly accelerated.
“The monthly Consumer Price Index (CPI) for April showed an uptick when a slowdown was anticipated, marking the second consecutive month of higher-than-expected inflation. This development complicates the Reserve Bank of Australia’s (RBA) policy decisions.”
Investors need to adapt their portfolios accordingly, focusing on asset classes and sectors that can thrive in a higher-rate environment while managing risk effectively, said Green.
They are likely to allocate more towards shorter-duration bonds and high-yield corporate bonds to take advantage of higher yields without significant interest rate risk.
In equities, they will focus on sectors that are less sensitive to interest rate fluctuations. Tech and healthcare stocks, known for their growth potential and relative independence from borrowing costs, are likely to offer stability and potential returns.
Inflation-protected assets, such as commodities, will be attractive as they can help safeguard purchasing power and provide a buffer against unexpected inflationary spikes.
“As ever, diversification is the investors’ best tool to position themselves to mitigate risk and seize opportunities,” said Green.
He concluded, if things remain on the current trajectory, “we expect global policy to remain ‘higher-for-longer’ for the rest of the year.”
