TOL - 25th Sep, 2023
Schroders: Hiking interest rates further will not solve bigger problems
400 basis points worth of rate hikes has affected markets but its effect on the economy is of far greater relevance.
The fastest interest rate hiking cycle in history has left a brutal trail in its wake. Many profitless assets were sent packing, bond and equity valuations fell sharply, and caused a surge in mortgage rates that is still being felt today.
Let's not forget that the bulk of this fixed-rate mortgage roll-off is still happening before our very eyes. The largest shift from fixed rates to variable rate home loans will not finish up until the end of this year.
But the surge in interest rates has also exacerbated something else - an unequal wealth distribution which was always there but has now really come to the fore.
And there may be no chart that demonstrates this better than this slide from the recent Commonwealth Bank full-year result. Deposit balances, changes in savings, and the change in spending, are all moving higher among retirees while mortgage holders and working Australians bear the brunt of the challenge.
And while reported hardship claims are down by more than a quarter compared to their pre-COVID average, the impact of these hardship claims can be seen on city streets and in salary negotiation scenarios across Australia.
This trend, in part, explains why Martin Conlon, head of Australian Equities at Schroders, believes interest rates should not rise further. Not because disinflation is clear but because the impact of rates on our society's less fortunate is clear and widening.
"I'm not sure that interest rates are proving the right tool. They are a blunt tool and I'd probably say that raising interest rates further will not be the right solution," Conlon said on the asset allocation panel at the recent Livewire Live event.
He added that the surge in rates (and the context around what happened in the 40 years beforehand) has actually achieved the very opposite of what it was set out to do.
"Interest rates aren't doing what they did back in the 1970s and a long period of declining interest rates transferred. Most of the wealth from young to old and interest rates now are actually exacerbating that problem."
In this excerpt from the recent Livewire Live event, Conlon shares his thoughts on the interest rate cycle which has played out over the last 18 months. He also expands on his thesis around why interest rates should not rise any further.
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
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