War against inflation is part won - expert

The anti-inflationary test match has passed half time, judging by comments from a veteran investment expert to a seminar in Wellington.

Wednesday, September 21st 2022, 6:00AM

by Eric Frykberg

Nikko Asset Management head of bonds and currency, Fergus McDonald, thinks there is still some way to go before inflation slips back to the intended margin of 1% to 3%. Even then, it would remain much closer to 3% than to 1%.

McDonald says the “heavy lifting” had already been done by the Reserve Bank, now that it has increased the Official Cash Rate (OCR) from 0.25% to 3% in just one year.

While this movement was very rapid, there is more to go.

“Markets are anticipating a terminal cash rate of 4.25% to 4.5%,” McDonald said.

“They will get there quite quickly, by the end of the year, or early next year, so we are about 80% through that Official Cash Rate rise.

“We have seen that priced into mortgage rates which then feed through to people's spending patterns.”

McDonald went on to say that about 50% of people had fixed their mortgages at higher rates and over the next six to nine months, that would hit them in the pocket book, slowing the economy.

That would bring back inflation within the next 12 to 24 months.

And what about the long term average, over, say, 10 years?

“Inflationary expectations will be somewhat elevated, but will track down, probably to between 2% and 3%, but probably not close to 1% out of the 1% to 3% band.”

Also in his address, McDonald insisted that inflation was a very serious thing, which could undermine an entire economy. It was also very hard for the average citizen.

He said the current inflation rate of 7.3% made it harder for people to pay their daily costs.

And wage rises tended to lag behind price rises, meaning the average worker would always experience hard times for a while, even if there was a big wage rise at the end of the day.

In addition, it would often not provide real compensation, because prices had to be paid out of post-tax income.

So to make up for inflation at 7.3%, a worker on a 33% tax rate would need a pay rise of 9.7% just to stand still.

Tags: inflation