During Thursday’s AIST webinar, AustralianSuper’s CIO Mark Delaney urged investors to watch Australia’s inflation rate, with pockets of the market undergoing ballooning costs.
Mr Delaney said bond, equity and property markets are all expensive due to low-interest rates, making the bank’s decision on rates a key risk for investors.
“If the interest rate story would materially change markets would have to reprice,” Mr Delaney explained.
“Interest rates would materially change if the market got the inflation story wrong and you look at 3.5 per cent inflation for the next four years and it will materially be different.”
The CIO opined that it is currently difficult to get an appropriate reading on price changes while the supply side is battered by COVID-19 restrictions.
“You assume supply would come back because it always comes back but COVID is so unusual that it might just take longer,” Mr Delany said.
While investors looking at their returns are hoping inflation remains lower for longer, the Reserve Bank is desperately trying to lower the unemployment rate to put pressure on wages in order to eventually lift inflation.
In order for Australia’s currency to be preserved over the longer-term and for sustained economic growth, the RBA believes Australia needs to achieve its inflation target of between 2 and 3 per cent.
It is only then that the bank will consider lifting interest rates, despite not having done so since November 2010 – having held or cut rates 129 times in a row.
Despite history not being on the bank’s side, Mr Delaney believes Australia is moving towards inflationary growth.
“We are seeing it [inflation] is the first point, there’s a lot of it around,” he said.
“The central banks and all the markets say it’s transitionary. If that proves to be wrong then we will have a big issue.”
Noting that services remain strong and continue to grow at around 3 per cent per year, Mr Delaney said according to US inflation charts, goods prices have not increased since 1995, with globalisation and technology playing their role in keeping costs lower.
“But now COVID and supply disruptions are restricting the supply of goods and goods prices are going up for the first time in 30 years,” Mr Delaney concluded.
“You hope it’s not the start of a cyclical trend.”
