Plan for higher interest rates for longer and invest cautiously

Higher-range interest rates will also drag on for longer as the Reserve Bank of Australia tries to unstick the economy's sticky inflation problem, according to Ord Minnett's Malcolm Wood.

The current RBA rate of 4.35 per cent, set last November, followed 12 increases in the prior 15 months after November 2020's record low point of 0.10pc.

Mr Wood said increasing cost pressures in the economy, including a burst of recent public sector wage increases and pay rises in the wider market, were keeping inflation sticking annoyingly above the RBA's target inflation band of 2pc to 3pc.

"Sticky inflation in Australia and the US will be with us for a while - we think the RBA has more work to do," he told a financial markets seminar at Beef Australia.

Ord Minnett researchers were also convinced the share market had failed to factor in "higher for longer rates", prompting the stock broking and wealth advisory firm to urge caution with share market investment strategies.

"We think inflation (at 3.6pc in the first quarter of 2024 and up 4pc year-on-year) will mean the RBA will have to hold rates higher, and possibly lift them higher still," he said.

The longer run of inflated lending costs would not help the farm sector, but the Australian dollar should stay in a relatively export-friendly downside, partly because softer farm commodity prices and mining sector demand were making our currency less attractive.

After four years of near-record farm export results, top-line prices were weaker, but input cost peaks had also unwound, although may not ease any further.

Weak economic growth and big debt risks within our biggest export market, China, were notable red flags - and far worse than Japan in the 1980s - which would subsequently depress our dollar's fortunes.

Bank of Queensland's chief economist, Peter Munckton had a similar message, predicting pre-election federal government spending and July's long-promised tax cuts would stimulate the economy and make it difficult to quell inflationary activity.

"Global interest rates are falling and I think the Australian economy will be in better shape in 12 months' time, but I don't expect rate cuts this year," he said.

He noted historic interest rate pressure which in 1989 saw the official cash rate hit 17.5pc had its origins in inflationary trends more than 20 years earlier in the 1960s, and rates subsequently took another 20 years to come down after their '90s peak.

"There is no way the RBA will let inflation start escaping like that again," Mr Munckton said.

"They know how hard it is to get back into the bottle."

Even so, inflation and interest rates at current levels had not been experienced for almost two generations.

In addition to rate stresses, he said Australia's fixed income tax take had never been higher because of tax bracket creep chewing into pay rises.

"People feel they're doing it tough because real household disposable income hasn't been smashed so hard in 60 years," he said.

Although this week's federal budget was expected to predict inflation below 3pc by year's end, Mr Munckton said the economy still had worker shortages, plenty of big engineering project pressure, housing demand and government spending initiatives counterbalancing the spending restraint being applied by households.

Canberra was battling with the challenge of preventing economic growth from stagnating, while also reining in rising costs.

While global inflation trends have deflated in the past year, at Ord Minnett, Mr Wood, the head of asset allocation, said the past year's slowing consumer price index figures were notable in Europe and Canada, down to 2.7pc and 2.9pc respectively, while Australia and the US were still around 4pc.

"Consumer spending activity in the US is in great shape and unemployment has been below 4pc for 27 months in a row," he said.

However, regardless of who won November's US Presidential joust, the US would face a "terrible budget deficit challenge" coming to a head in the next political term, making the US economy riskier as an investment space and as an influence on global markets.

Investing in bonds makes sense in uncertain economic times, but the sharemarket has been a better longer term bet says Ord Minnett. Source: Vanguard.

Given the many economic and political uncertainties at work globally, after what had until recently been 30 years of low risk, Ord's Queensland state manager, David Lane, said the firm had less faith in international shares, particularly exposure to China.

Prospects in Japan and emerging markets were preferable, while caution was needed in the US.

Despite its big performing stocks, the US was an erratic equity market, with long term performance across all asset classes in the past 24 years yielding behind Australian shares.

US bonds had also ranked behind the local market in the same period, although bond returns, despite having a locked-in predictability advantage, came in almost 50pc below Australian shares.