Investment professionals have shared criticism over how central banks have responded to the Covid-19 pandemic, with one arguing there is still more pain to come as a result of the bank’s monetary policy.
Speaking at the Professional Planner Researcher Forum IML senior portfolio manager and head of investment research Hugh Giddy said the next economic cycle will be “tricky” due to past monetary policy from central banks.
“I don’t know how they’ve still got their jobs because they’ve been completely wrong,” Giddy said.
“Phil Lowe has been tasked with getting rid of the inflation he caused by overstimulating the economy. I don’t think I’d have my job if I got things so wrong.”
Lowe recently spoke during government hearings about how inflation grew faster than predicted leading to rate rises earlier than expected.
The current RBA cash rate level is 3.10 per cent which was set on Tuesday, 6 December 2022.
T. Rowe Price global impact equity strategy portfolio manager Hari Balkrishna described inflation as “the elephant in the room”.
“If we want to think about the health of markets going forward, it’s something we’ve got to bring under control as a global society,” Balkrishna said.
A whole new world
Balkrishna noted during the pandemic that because everyone was shut down and opened at roughly the same, the supply side couldn’t keep up with demand.
“Against the backdrop of China continuing to have a zero Covid policy with supply chains not opening up, the supply side hasn’t been able to keep up with the swings in demand at the same time.
“Because of the high-rate environment that demand side is correcting and the supply side is improving.”
Evergreen Consultants founder and director Angela Ashton said financial markets wereentering a “very different world” compared to the recent period of quantitative easing and interest rates will be higher than they were last decade.
“Regardless of exactly how we get there, the important thing is what does that mean for markets and portfolios; I don’t think next year or 2024 looks like a big growth bet again,” Ashton said.
Under pressure
From a global perspective, Balkrishna said there’s evidence of labour shortages improving which will strengthen the worldwide economy in addition to supply chains reverting to normalcy.
“Some of the supply chain [is] getting better – not completely out of the woods – but getting better,” Balkrishna said.
“That aspect of inflation I’m more positive on. Some of the steps central banks have taken in the last few months, the hawkish messages coming out of the Fed and other central banks means the days of double-digit inflation can hopefully correct into next year, but that could be transitory.”
From a domestic perspective, Giddy said speaking to companies in Australia, there were concerns about how wage increase demands will continue to create upward pressure on inflation.
He cited Woolworths as example which uses a retail award through an enterprise bargaining agreement so there was a lag in wages matching inflation.
“The bargaining and change in industrial relation laws is probably to be worse where companies are going to have to pay up because people feel the cost of living has gone up.”
Giddy said workers will try and recoup losses from inflation which will go into future inflation and thus create a cycle.
“To get it out of the system, it’s not enough to say shipping costs have to come down; that sorts out some supply constraints that have led to shortages here and there,” Giddy said.
“But once it’s got into the psyche ‘I need to keep pace with inflation, I need that pay increase’, it’s going to be nasty. The only way to get rid of that psyche is for quite a lot of people not to have a job.”
