BlackRock boss Larry Fink says inflation will be ‘higher for longer’

Influential BlackRock chairman Larry Fink believes markets and consumers need to prepare for a world where inflation is higher for longer – including in Australia.

Influential BlackRock chairman Larry Fink believes markets and consumers need to prepare for a world where inflation is higher for longer – including in Australia – but is still of the view the giant US economy will be able to avoid a hard landing.

The head of the $US9 trillion ($US13 trillion) asset manager – the world’s biggest – said the structural drivers of inflation since the global pandemic remain, particularly as companies are being forced to re-evaluate their supply chains away from China while labour markets remain tight.

And while the bulk of the energy shock prompted by the Russian invasion of Ukraine is behind us, governments around the world are accelerating their push into decarbonisation of the power and energy grids. This is set to add a large “green premium” to infrastructure and keep pressures on the supply side.

Global markets will be able to adjust to higher interest rates. Picture: Getty Images/AFP

“It’s hard for me to see how inflation is going to arrest itself,” Mr Fink told The Australian in an interview. “Some of this inflation is very structural – it’s not something that is temporal.

“The world is just at a point now where inflation is elevated in Europe, elevated here in Australia, elevated in the United States, and relative to where it was elevated in Japan,” Mr

Fink said. All this means that central banks are likely to keep cash rates higher for longer as they struggle to get inflation under control.

He was speaking after the Reserve Bank of Australia this week hiked the cash rate by 25 basis points to 4.1 per cent, the highest level in more than a decade and RBA governor Philip Lowe warned of more to come.

At the same time, interest rates in the US have moved to 16-year highs as the central bank seeks to get on top of inflation there. The US Fed meets again next week although economists expect the central bank to pause its rate hikes for now.

Even so, in a world of higher cash rates Mr Fink believes markets can adjust – although the process will be bumpy in parts.

Rising rates are likely to see more stress in commercial real estate, he said, which will impact the banking system. However this is “highly visible” rather than a new systemic issue for markets.

He pointed out “by all historical measures interest rates are not that high”. Although relative to just a few years ago “they’re shockingly high”.

For borrowers that took out loans two to three years ago and rolling onto new and higher interest rates, it is going to create a big shock. While this process is now playing out around the world including in the US, Mr Fink believes the financial system has the resilience to absorb it.

In the US in particular there are more than $US1 trillion in stimulus programs underway built around President Joe Biden’s centrepiece green energy policy the Inflation Reduction Act.

Mr Fink believes that while it is going to make the US Federal Reserve’s job harder, it will keep unemployment low and labour markets tight. It will also mean the US is likely to avoid a hard landing, he said.

“I’m wary of where the markets are but I’m not bearish by any means,” he said.

Mr Fink is the billionaire co-founder of BlackRock and was speaking to The Australian in Sydney following a round of client briefings.

Commercial property may be the next area of risk as interest rates rise. Picture: NCA Newswire /Gaye Gerard

Given its size, the asset manager’s influence goes beyond the boardroom and sometimes into politics, where Mr Fink has been outspoken around climate change and decarbonising the economy. Through his letters to CEOs Mr Fink has warned that global warming remains the “defining issue” of our time.

New York-headquartered BlackRock manages money for tens of millions of clients, from individual investors in index-tracking ETFs, and then it has more than $US4 trillion is active mandates on behalf of Australia’s big super funds and the $200bn Future Fund.

It is a substantial shareholder in most of Australia’s top companies and also has sizeable holdings across most major listed markets.

Mr Fink said the world is still going through a period where we are moving from “globalisation to fragmentation” which is adding another layer to inflation.

“There is a big reason why supply chains were heavily built around China. And that was because it was the most efficient, productive, cheapest supply chain,” Mr Fink said.

“Companies around the world post Ukraine invasion are asking themselves, where is our dependency? In Europe post invasion they’re saying we’re a dependency on Russian gas. And so you’re seeing a whole revaluation of supply chains from the most efficient, and now we use the word resiliency to create a more resilient supply chain.

“That means we’re creating more duplication of supply chains. But most importantly, we’re creating supply chains that pose less geopolitical issues.”

In early March, Mr Fink warned in his annual letter sent to CEOs that the US could be on the cusp of a regional banking crisis after Silicon Valley Bank had collapsed just days before he published the note. The BlackRock chair says he is now more optimistic about the banking system and well functioning capital markets played a big role in this.

“The key for any economy is having strong capital markets and a strong banking system. And if one side has issues or weaknesses, the money will flow into one side and vice versa. I would say, despite the fears of that one weekend, overall, it wasn’t a major crisis, especially after (US banking regulator) the FDIC stepped in.

“It showed the resiliency of markets, the resiliency of the ability to move money around safely. So I came away more optimistic.”

Even so, he said crisis should be a time for reflection and this includes whether there are too many banks in the US system for it to be resilient.

“Do we need 4000 banks? And that’s a legitimate question. There is a strong belief within the United States that local banking is good for the communities and that’s what society wants. Australia has very few banks but some very strong national champions.”