There’s a lot going on with markets at the moment. Inflation, OCR increases, Chinese regulatory crackdowns - plus global lockdowns, reopenings, and more lockdowns. What’s next, and what could happen to term deposit rates? Markets are currently pausing for breath until we get some clearer direction, explains Pie’s CEO & Founder Mike Taylor.
What businesses benefit from higher inflation?
During periods of high inflation, companies that can protect their margin by raising prices to cover increased costs often do well. They need to pass on these costs to the end consumer without reducing demand for their product or service. This can be tricky if you don’t have pricing power. So businesses need good management, clear communication and a well executed marketing/sales plan.
Healthcare is a good example of an industry that can pass on extra costs, through the likes of medicine and health insurance.
Payments companies also benefit from rising prices on products and services. These companies, for example PayPal, take a percentage from every transaction. This means that as the price of goods rises, PayPal benefits because the percentage equals a higher dollar amount. Pie’s portfolios are already tilted towards these types of companies, including payments and subscription model companies, and ones that have pricing power. So we have made little change.
How does the OCR impact rates?
The OCR does have an impact on short-term interest rates but generally long-term interest rates (ie 10-year government bonds) are priced by the market. So the OCR of course has an impact but it’s not always a 1:1 correlation. For example if the OCR is increased by 0.25% that doesn’t mean all one-year mortgages will move up by 0.25%.
What will happen to term deposit rates?
I think the banks are still awash with cash and utilising the funding for lending programme (FLP), which enables them to borrow from the RBNZ at the cash rate for three years. So there is less of a need to “pay-up” for retail deposit money. This scheme runs until 6 December 2022. Therefore I would not expect to see much of a lift in deposit rates until 2022.
Information is current as at 19 August 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.