While Australia’s sticky inflation, and the Reserve Bank of Australia’s subsequent course of action, have been a cause of concern for investors, the investment executives responsible for over $380 billion in funds under management are getting comfortable with a higher-for-longer scenario.
Last month, the central bank left the cash rate unchanged at 4.35 per cent for the fifth consecutive time, though it said it can’t rule anything “in or out”.
A week later, the latest CPI print indicated inflation rose 4.0 per cent in the 12 months to May 2024, up from 3.6 per cent in April, stoking concerns that a rate hike could be a real possibility at the next RBA meeting.
Economists, since then, have offered varying perspectives on where interest rates could be headed.
Speaking to Super Review, John Pearce said he doesn’t like the phrase ‘higher for longer’. Instead, he opts to call it “normal for longer”.
“I think where we are is normal, so personally, I think the central banks should take the year off. The Reserve Bank can take the year off, maybe the Fed can cut twice and then take the rest of the time off, and we just stay here for a while and let economic cycles run their course,” he said.
For the investment executive, the biggest concern on everyone’s minds is likely the resurgence of inflation, although latest economic indicators from the US are looking “pretty good’.
“We had some soft employment numbers [last week], the latest Personal Consumption Expenditures (PCE) numbers in the US are pointing to a softening,” said Pearce.
“We could be in a sort of Goldilocks environment where we’re going to engineer a softish landing without having to affect a major recession.”
Reflecting on the scenario in Australia – the only G10 nation where underlying inflation has increased since December – Pearce does not believe a rate hike is the “right thing”.
“I don’t believe that monetary policy is the villain here, I believe it’s fiscal policy. I think the monetary policy, the hikes, have already worked its way through the system in the sense that the net debtors are already being impacted,” he said.
“They’re already cutting their spending, the people with the mortgages. Young people that are the lower quintile in terms of incomes, they’ve already cut their expenditure.
“[By] hiking rates, you’re going to basically create more income for rich people.”
Earlier this month, Australian Retirement Trust’s head of investment strategy Andrew Fisher also forecast a higher-for-longer scenario.
In conversation with Super Review, he said Australia remains a little behind in its fight against inflation.
“We don’t think the RBA is in a position to want to raise rates from here, we think it’s more likely that the RBA just maintains the current setting for longer than the market might anticipate,” Fisher said, adding this is “likely to be a little bit of a drag”, on a relative basis, on growth domestically versus growth offshore.
