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Future Fund chair Peter Costello says it is far too early to bank on interest rate cuts in Australia later this year, despite signs that inflation is easing, and that investors have likely been too optimistic.
Delivering the final portfolio update of his term at the sovereign wealth fund on Tuesday, Costello, a former federal treasurer who is also chair of Nine Entertainment, the owner of this masthead, said markets had probably jumped the gun in pricing in rate cuts.
Future Fund chair Peter Costello said he was cautious about the extent to which the recent rally in markets could be sustained.Credit: Michael Quelch
“We’ve still got a consumer price index which is 4 or 5 per cent, and the Reserve Bank is saying they don’t expect to be back in the target band until 2025,” he said. “A big part of the rally in markets was based on the assumption that inflation has peaked, and rate cuts will come through in 2024. I think it’s far too early to say rate cuts are in the bag in 2024.”
Money markets do not expect the RBA to move rates at its first meeting of the year in February, but they are pricing in at least one interest rate cut in the second half of this year.
While equity markets rallied in the final quarter of last year on optimism about rate cuts, Costello said he was cautious about the extent to which it could be sustained through the course of 2024 amid inflation which remains above target.
“Strong labour markets, wage pressures and high-energy prices are still feeding into price pressures,” he said.
The Future Fund reported an 8 per cent annual return for 2023, below its 10-year average of 8.2 per cent but above its target of 6.9 per cent, and the total value of the fund reached a record $211.9 billion.
Future Fund chief executive Raphael Arndt said one of the main changes made to the overall portfolio in 2023 was a further move into credit which now makes up nearly 11 per cent of the fund.
“That’s because we think it’s been quite well-rewarded and if interest rates stay high or go higher, then that would flow through to the returns, compared to long-duration equities which are very highly poised for interest rate cuts.”
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