Federal Reserve Chairman Jerome Powell, Bank of England Governor Andrew Bailey and Reserve Bank of NZ Governor Adrian Orr. Graphic / NZME
Strategists from global investment giant BlackRock warn people shouldn’t hold their breaths for material interest rate cuts in the near to medium term.
They believe central banks in the western world are committed to keeping
monetary conditions tight for long enough to ensure inflation is well and truly stamped out.
What about the impact on the highly indebted? And what if China’s economic woes pull countries that export a lot to China even deeper into recession?
BlackRock Asia Pacific chief investment strategist Ben Powell believes central banks will look past, as they won’t want premature rate cuts to reignite inflation and spark another round of costly rate hikes.
“Declaring victory too soon would be a mistake,” he told media at a briefing in Sydney, suggesting interest rates would remain higher for longer.
“This is, to a degree, a return to the old normal.”
Powell recognised that while younger people in particular have become accustomed to relatively low interest rates, they’re far from the norm when you look further back in time.
“Maybe it’s the last 15 years that’s been the anomaly.”
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Furthermore, Powell believed economic conditions were such that central banks wouldn’t “come to the rescue” with rate cuts like they have in the past.
“We are in a totally different regime,” he said.
Specifically, he pointed to three factors constraining economic supply relative to demand (a dynamic that exacerbates inflation): aging populations hampering the size of workforces, the transition to cleaner energy, and “globalisation rewired” – politics and geopolitical tensions disrupting supply chains, making them less efficient.
What about the fact growth in China is much slower than expected, as the superpower comes through the worst of Covid with deflation, rather than inflation?
Will central banks, including the Reserve Bank of New Zealand (RBNZ), start cutting interest rates if China’s sluggishness really weighs on exporters’ bottom lines and the economy more broadly?
The outlook is particularly bleak for the New Zealand dairy sector, as softer demand from China lowers the milk price.
Powell believed China was acting as a disinflationary force globally.
Its weak currency is lowering the price of its exports, which could be useful for central banks fighting inflation.
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However, until central banks get more data out of China, Powell couldn’t see them “gambling” on the superpower’s weakness “saving the day”.
BlackRock’s Australasia head of multi-asset solutions, David Griffith, also made the point Chinese policymakers have room to provide stimulatory interest rate cuts.
Should financial stability issues arise from the economic slowdown, Griffith believed the RBNZ could respond using other tools at its disposal, rather than cut the Official Cash Rate (OCR).
Furthermore, banks have plenty of capital to deal with a potential spike in defaults. Banks’ bad debts have risen in recent months, but remain low by historic standards.
How are these dynamics affecting BlackRock’s investment strategy?
At a high level, Powell said the “set and forget” era was over. He believed investors had to take positions more frequently and with more granularity. They have to be specific about the kinds of risks they want to expose themselves to in an increasingly complex environment.
He said BlackRock was also “harnessing mega forces”, focusing on areas like artificial intelligence.
Griffith, who is particularly focused on New Zealand, said he was “modestly cautious” when it came to the outlook for equities and growth assets in general.
“We are watching earnings outcomes closely to see how much of the broader impacts of the policy rate increases are going to start to impact earnings,” he said.
Griffith preferred global and emerging market equities over Australasian equities, including New Zealand equities, which he believed remained over-valued.
Indeed, emerging markets typically aren’t contending with as much inflation western economies are grappling with.
Griffith was taking a “more granular” approach to investing in fixed income. Because inflation is proving sticky, he liked inflation-linked bonds.
Finally, he said a small part of his portfolios were allocated to gold and he had exposure to foreign currencies for extra diversification.
*ASB, which uses BlackRock’s services, paid for the Herald to attend the BlackRock briefing in Sydney, which has been reported on.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.