Investors have no clue when central banks will cut rates


We need to stop kidding ourselves – our forecasting is dreadful.

By: Jonathan Jones,

Editor, Trustnet


The market has become dominated by interest rates and the expectations of future cuts but it is time we as investors learned our lesson – we have no idea what’s going to happen.


Some will undoubtedly have moved their portfolio around based on expectations that inflation is coming down and that central banks around the world will start to withdraw the exorbitantly high rates that have stymied growth and caused a cost-of-living crisis.


Yet forecasting when these things will happen is foolish. Below are two charts that highlight just how ridiculous this is.


The first shows the implied rate of interest rate cuts from the US Federal Reserve at the start of the year, compared with last week.


In the span of just two months, expectations that rates would end the year at 3.75% (down from the 5%-5.25% range today) look farfetched. Now, ‘experts’ expect them to be around 4.25% by the start 2025.

Source: Waverton Investment Management


The same phenomenon has taken place in the UK. At the start of the year – with inflation plummeting – there were hopes of a 4% Bank rate by the end of 2024. Today that stands around half a percentage point higher, at 4.5%.


At the start of the year, five cuts were expected in 2024 – a figure which has dropped to three today. The first is anticipated to take place in August.


Source: Waverton Investment Management


Yet William Dinning, chief investment officer at Waverton, said: “Given that the UK economy is, at best, sluggish after being in a technical recession in the second half of 2023, it is possible that the current market projection for policy rates may end up being too pessimistic in the UK.”


This doesn’t seem like it should matter all that much. What’s a rate cut here or there? But it really does. Earlier this week, Jupiter fund managers Adrian Gosden and Chris Morrison explained the mind-boggling impact these prints have on the market.


At the end of last year, the FTSE 250 UK mid-cap index rose 5% in two days on the back of two better-than-expected inflation prints (3% on the November US consumer prices index (CPI) print and 2% on the UK December reading).


Fast forward to January and with UK CPI coming in a whopping 0.1 percentage points above expectations, the market dropped 2%.


So despite preaching fundamentals, focusing on the long term and buying good companies – this year looks like another that will be driven entirely by factors outside investors’ control – namely by central banks, who can’t afford a misstep.


It can be hard to look through all this – particularly as interest rates and inflation have dominated the financial pages for the past 18 months and look set to do so again in 2024.


But remember, investing is supposed to be about sound decision-making and getting rich slowly, so why gamble on the next interest rate decision? This seems counterintuitive at best.


If the experts can change their minds so dramatically in the space of two months, then what chance do the rest of us have of getting it right? It’s clear no one really knows what is going to happen.


Investors should continue to do what they have always done – pick good funds, stocks or investment trusts, put their head down, and ride it out. Yes there will be lumps, and yes the macroeconomic environment will make some picks look silly on certain days or even months, but as long as the rationale for owning an asset is right, it will correct itself eventually.





Please Note:

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. 


Please note the above article was first published by Trust Net and should not be regarded as individual investment advice on whether to buy, sell or hold any of the funds mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.


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