Research notes

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Australia’s households could face higher electricity costs and rising inflation in 2025. With electricity subsidies ending and energy supply constraints persisting, the Reserve Bank of Australia (RBA) may be forced to lift interest rates. Here’s what you need to know.

Key Summaries

• Retail electricity subsidies worth $9 billion per year are being phased out.
• Retail electricity prices are expected to rise sharply in 2025.
• Inflation could accelerate to 4% or more in the second half of the year.
• RBA may then need to make three 25-basis-point rate hikes.
• The cost of renewable energy is not just the cost of wind and solar,
  natural gas is also needed to stabilise renewable energy.

Why Are Electricity Prices Rising?‍

The government’s decision to remove $9 billion in electricity subsidies will expose households to the true cost of power. Over the past two years, wholesale electricity generation costs have surged by 23%, driven by supply constraints and reduced capacity in New South Wales.
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How Will This Impact Inflation?‍

Electricity prices feed directly into the Consumer Price Index (CPI) with a lag of around two quarters. As subsidies end, retail prices will rise, pushing inflation higher, especially in the second half of 2025. Businesses will face increased costs and pass these on to consumers.‍
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Interest Rates: RBA’s Likely Response‍

Higher inflation means the RBA will need to act. While some banks forecast small rate hikes early in the year, Morgans expects three 25-basis-point increases in the second half of 2025. This could significantly impact mortgage holders and borrowing costs.
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The Role of Renewable Energy and Gas Pricing‍

Despite claims that renewables are the cheapest energy source, electricity prices remain high because consumers need power 100% of the time. The marginal cost of electricity is set by natural gas, which stabilises supply when renewables cannot meet demand. Global gas prices, influenced by events such as the war in Ukraine, ultimately determine the cost of electricity in Australia.

FAQs

Why are electricity prices increasing in Australia?‍

Because subsidies are ending and generation costs have risen by 23% over the last two years.

How will this affect inflation?‍

Consumer prices could rise by 4% in the second half of 2025 as higher energy costs flow through the economy.

Will interest rates go up?‍

Yes, the RBA may raise rates three times in the second half of 2025 to curb inflation.

Are renewables making electricity cheaper?‍

Not necessarily. Prices are influenced by natural gas, which sets the marginal cost of supply.

What does this mean for households?‍

Expect higher power bills and increased mortgage costs if rates rise.
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Australia faces a challenging year ahead with rising electricity costs, accelerating inflation, and likely interest rate hikes. Planning ahead is essential for households and investors.

Want to discuss how this impacts your portfolio?

DISCLAIMER: Information is of a general nature only. Before making any financial decisions, you should consult with an experienced professional to obtain advice specific to your circumstances.

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Federal Reserve Interest Rate Outlook: What Investors Need to Know

The Federal Reserve’s latest projections reveal a surprisingly moderate outlook for inflation and interest rates. Despite tariff concerns earlier this year, the Fed expects inflation to remain subdued and rates to decline gradually. Here’s what this means for markets and investors.

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Key Takeaways

• Fed forecasts interest rates around 3.4%, aligning with market expectations.
• Inflation impact from tariffs is far lower than predicted.
• Core inflation expected to fall to 2.5% next year and reach target levels by 2028.
• Growth outlook remains positive with no recession in sight.
• A benign economic environment could support U.S. equities.

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What the Fed’s Latest Projections Tell Us

Every quarter, the Federal Reserve releases its Summary of Economic Projections (SEP), which includes forecasts from the Federal Open Market Committee and regional Fed banks. These projections carry significant weight because they reflect the collective view of some of the most influential economists in the U.S.

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, December 2025

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Interest Rate Outlook: Gradual Declines Ahead

Our model estimated the equilibrium Fed funds rate at 3.35%, and the Fed’s own forecast is close at 3.4%. This suggests rate cuts are likely in the near term, with further declines to 3.1% in subsequent years. For investors, this signals a stable environment for borrowing and equity markets.

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Inflation: Lower Than Expected Despite Tariffs

Earlier predictions suggested tariffs could push inflation up by 1.6%, but the actual impact has been minimal. Headline inflation is projected at 2.9%, and core inflation at 3%, well below initial fears. The Fed expects core inflation to fall to 2.5% next year, then to 2% over the longer term.

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Growth Outlook: No Recession on the Horizon

Despite global uncertainties, the Fed anticipates steady growth: 1.7% this year, 2.3% next year, and 2% thereafter. This benign outlook, combined with easing inflation, suggests a supportive environment for U.S. equities.

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FAQs

Q1: Why is the Fed cutting rates?

To maintain economic stability and support growth amid moderating inflation.

Q2: How will lower rates affect investors?

Lower rates typically reduce borrowing costs and can boost equity markets.

Q3: Are tariffs still a risk for inflation?

Current data shows tariffs had a smaller impact than expected, thanks to strong service-sector productivity.

Q4: Is a U.S. recession likely?

The Fed’s projections show no signs of recession in the near term.

Q5: What is the Fed’s inflation target?

The Fed aims for 2% core inflation, which it expects to achieve within a few years.

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The Federal Reserve’s outlook points to a stable economic environment with easing inflation and gradual rate cuts. For investors, this could mean continued opportunities in equities and fixed income. Want to learn more about how these trends affect your portfolio?

Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy.

This publication covers

Economics - 'The Australian economy: a landscape of challenge and opportunity'
Asset Allocation - 'Structural shifts demand a portfolio rethink'
Equity Strategy - 'Diversification is key'
Banks - 'Fundamentals don't justify share price strength'
Industrials - 'Prepared for the uptick'
Travel - 'Selective opportunities'
Resources and Energy - 'Steady China and tight supply'
Consumer discretionary - 'Recovery underway'
Healthcare - 'Attractive, but with limited opportunities'
Infrastructure - 'Rising cost of capital but resilient operations'
Property - 'Structural tailwinds building'

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