Stock Takes podcast: No easy fix for high inflation environment

The cost of borrowing could be set to rise further. Photo / 123RF

There’s no easy remedy for solving the economic challenges New Zealand faces challenges around high inflation says Fisher Funds portfolio manager Matt Peek.

Speaking in the wake of the Budget, Peek told the Stock Takes podcast that while the Government had announced policies to help middle New Zealand the higher spending in the Budget could mean borrowers face higher interest rates.

Peek said the Budget had been more expansionary than many had expected.

“The Government is spending a bit more money.”

One positive was the Treasury forecast that New Zealand might manage to avoid a recession in the next year.

“So there is more growth expected. GDP is going to be higher than people thought at the half year update.”

But Peek said when the Government dipped into its pocket to spend more money it had to fund that somehow.

“They are borrowing $20 billion extra through issuing bonds over four years which is about double what people had expected.”

That had come as a shock to the market and had seen bond rates and interest rates shoot up.

“People are worried that by spending more money than expected that’s going to also be a driver of incremental inflation and make it harder for the Reserve Bank to get inflation down to its target range.”

The Reserve Bank is due to make an official cash rate announcement today with economists picking a likely 25 basis point rise increasing the current rate of 5.25 per cent to 5.5 per cent.

“People had been expecting a modest increase to perhaps what could be the top of the cycle cash rate of - it’s currently at 5.25 per cent- but now expectations are it could put a larger increase through and then there might be more raises to go. So we might see interest rates going even higher because the Government is spending more money and it’s potentially inflationary.”

Peek said there was no panacea for solving an economic situation that the country had found itself in with inflation.

“The Government is doing some stuff to try to help middle New Zealand but at the same time anyone with a mortgage might end up getting hit with higher interest rates for the next little while. That’s the flip side of the Government spending a bit more money.”

Peek said if New Zealand didn’t tip into a recession that would be better for businesses.

Another factor was that migration had picked up. “That’s quite a turnaround from the last few years.”

He said businesses had been finding it difficult to fill roles in recent years and had faced salary inflation but now there might be more labour available and more demand for goods and services.

“That should help the corporate sector a little bit.”

But Peek said with the interest rates increasing companies could look to cut back on workers and he expected to see unemployment tick up a little bit.

Listen to the full podcast for more on the month in markets

Stock Takes is available on iHeartRadio, Spotify, Apple Podcasts, or wherever you get your podcasts. New episodes come out every Wednesday and are brought to you with support from Fisher Funds.