Be a good student of history to understand what comes next for interest rates and share markets, a leading banker says.

Better COVID-19 treatments and highly effective vaccines mean the 2022 focus will shift to what is happening in the economy, Goldman Sachs boss David Solomon said during a podcast released on Friday.

Speaking to bosses around the world, he said the same things are talked about at every meeting.

Top of mind are the pandemic and the response, workforce and return to office issues, supply chain frustrations, inflation and economic policy, technology and new innovations, and China.

But one issue is key.

“COVID is very quickly becoming endemic in society and we have to learn to live with it,” he said.

“The big one is inflation.”

If you are a chief executive, then the impact of inflation will for a couple of years dominate everything you’re doing, he said.

“If you’re an academic and you’re thinking about the next decade, well maybe it is transitory, maybe it’s not going to last for a decade, but it’s real and it’s going to affect growth.”

For everyday Australians, the mortgage is the big worry as the list of lenders with fixed rates under two per cent shrinks week by week.

Australia’s second-largest bank, Westpac, on Friday hiked fixed rates for the first time in 2022.

Researcher Sally Tindall at Rate City said the move comes as the US Federal Reserve is expected to lift rates faster and more aggressively than previously anticipated.

“We expect other banks to follow within days on the back of sharp increases to the cost of wholesale funding,” she said.

“Mortgage holders who were fortunate enough to lock in a record-low fixed rate over the last couple of years are immune to these hikes, but only for the duration of their fixed-rate term.”

To the extent that inflation is embedded and with sluggish growth to come, Mr Solomon expects share markets to come off the boil as higher inflation affects equity values.

“People have forgotten how much low rates, free money, affect asset prices, and you’ve got to be a good student of history,” he said.

“It’s not different this time.”

 

Marion Rae
(Australian Associated Press)