Rate rises will fail to tame inflation: $140b fund’s investment chief
Raising interest rates would do little to help the Reserve Bank’s battle against inflation and could even hamper these efforts by giving some households more money to spend, the chief investment officer of $140 billion fund UniSuper warns.
As the Reserve Bank board meets to set official interest rates this week, John Pearce, who oversees the fund’s investment portfolio, believes monetary policy has run its course when it comes to tackling the nation’s inflation problem.
John Pearce, chief investment officer of UniSuper, says monetary policy has run its course.Credit: Bloomberg
Financial markets are not expecting the Reserve Bank to raise official interest rates from 4.35 per cent this week, and many economists now believe the next move will be a cut.
Even so, some RBA watchers maintain the central bank should raise rates further to counter inflation, which accelerated to 3.8 per cent in the year to June, according to ABS data last week.
Pearce, in contrast, is unconvinced that controlling interest rates is the best weapon for fighting inflation at this point in the economic cycle. He said the people most likely to tighten spending further from higher interest rates had already endured enough.
“You look at the lower quintiles in terms of income – they’ve already reduced their spending. They’ve changed their habits. Why do we want to hurt them any more?” Pearce said.
At the same time, Pearce said some households would be “cheering on a hike in rates” because they would receive higher returns on their savings, allowing them to spend more.
The comments underline the mixed impact of raising rates, widely seen as a “blunt instrument” on households across the economy, including retirees with significant savings balances.
A UBS survey in June underlined strong growth in interest payments received by households, which accounted for 5.5 per cent of household income, which it said was the highest share since 1991.
There is also a wider economic debate about limitations of monetary policy (moving interest rates) to deal with inflation in areas such as rents, insurance and energy.
Pearce maintained that using fiscal policy – government taxing and spending through the budget – would be a more effective way to dampen inflationary pressure in the economy.
The Reserve Bank board meets to set official interest rates this week.Credit: Kate Geraghty
“Prove to me the direct connection between hiking rates 25 to 50 basis points more and a slowdown in inflation,” Pearce said.
“Because if you’re bumping up the incomes of people who are already spending … they’re going to keep spending.”
Many in the market expect rates to remain on hold for months, ANZ Bank economists on Friday predicting the Reserve Bank would make its first cut in rates next February and deliver “hawkish” comments after this week’s meeting.
As well as affecting households, interest rates also remain a key driver of market sentiment, with Wall Street and the ASX last week hitting record highs after the US Federal Reserve chairman Jerome Powell said the US could cut rates in September.
Investors will also be poring over a flood of financial results from Australia’s biggest listed companies over the rest of this month during the earnings reporting season.
Despite the slowing economy, Pearce says consumers appeared to be in generally reasonable shape, which pointed to “OK” results from companies. This makes him fairly positive on Australian banks – the fund’s biggest exposure – even though he struggles with the record valuation of CBA.
CBA shares briefly hit $138 last week before a slide on Friday. The stock has risen more than 25 per cent in the past year, recently overtaking BHP to become the largest company on the Australian sharemarket.
Pearce said institutional investors were struggling to justify the high price, and on “any reasonable metric” CBA looked overvalued. “We’re all scratching our heads as to how you can actually be a buyer at these sorts of levels,” Pearce said. Even so, bank stocks typically crashed when there was a fear of big writedowns, and this did not look likely given the state of the economy.
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