An independent economist is warning an "awful wad of cash" is being flushed in term deposits.
It comes after the US Federal Reserve is tipped to lift the benchmark rate above 5 percent and keep it there to squeeze too-high inflation out of an economy where the labour market remains strong.
Economist Cameron Bagrie told AM on Tuesday a defining theme of 2023 is going to be who is right between the financial markets and the US Federal Reserve.
"Financial markets are sort of playing off the 10-20 year playbook that interest rates move up. Then you force a bit of a recession, you crack the back of the economy, that drives disinflationary pressure, inflation comes back, you've got the recipe for an easing cycle," Bagrie explained.
"So what we're seeing with the financial markets is anticipation. Yes, interest rates still move up in the near term, but over late 2023, and 2024, interest rates move back down and that's what we've seen historically."
But Bagrie said the US Federal Reserve and other central banks are conveying a narrative they will need to keep rates a bit higher for a bit longer.
He added banks are starting to see money "roll in the door" through term deposits.
"If I have a look at what we're seeing within the term deposit space, i.e. what banks are receiving, the money coming in the door, the banks have seen about another 20-plus billion dollars roll in the door in the past six months.
"Now that reverses what we saw in 2020 and 2021. As interest rates move down, you start to get some rubbish interest rates on your term deposit, you'd either put that money to work in another investment vehicle i.e property, or else you'd look at holding it with a liquid account or savings or a transaction account."
Bagire said there is starting to be a pivot with transactions and savings account balances dropping and banks receiving more money from term deposits.
"What we're also starting to see is that an awful wad of cash is being flushed in term deposits," he said.
"I suspect that money that increased 20 odd billion is taking up some money that would ordinarily be redeployed into the likes of the equity market, commercial property or residential property, because once again, the yields in those markets at the moment, they look pretty light compared to where interest rates sit today."
Watch the full interview with Cameron Bagrie above.
