The Reserve Bank of Australia kept interest rates on hold at 1.5% today and gave little indication that it expects to lift cash rates over the rest of 2018. Traders are currently pricing in a 25 basis point lift to rates before the 2018's out, but expectations as to the speed of increases have been pared back since the start of the year.
Today the RBA reported that: "Inflation remains low, with both CPI and underlying inflation running a little below 2 percent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing".
The RBA is mandated to use its monetary powers to keep consumer price inflation CPI) in the range of 2-3 percent and as such is acknowledging that rates will need to remain low in order to lift inflation back above 2 percent into its targeted range.
"The central forecast is for CPI inflation to be a bit above 2 percent in 2018" the RBA reported, which suggests the bank is in a steady as she goes mode, with no short-term intention to move rates higher, or even lower if inflation fails to pick up as forecast.
The main obstacle to it moving rates lower to stoke economic activity and inflation is Australia's over-valued residential property market, with the Turnbull government now pressuring the macro-prudential regulator APRA to enforce tougher lending restrictions in a bid to avoid a housing bust that could smash the credibility of the government and central bankers.
As such it seems rates are set to remain low for a long time yet, with the Australian dollar likely to remain in a recent trading range between US76 – US81 cents.
As such dividend shares like Commonwealth Bank of Australia (ASX: CBA) are likely to continue to receive support in Australia, although the rider is rising debt rates in the U.S. still threaten to shake up global equity markets.
For example yields on "risk free" US government 10-year treasuries are creeping up towards 3% at around 2.88% today.
As such investors may start to re-rate the value of risky growth and dividend stocks lower when they can get 'risk-free returns' for 3%.
A return to normalised levels of inflation could also erode the value of equities that are valued on the basis of forecast future cash flows handed out to investors.
For example as inflation projections rise, the value of future cash flows offered by equities is less as money is cheaper. According to economic theory then stocks could come under selling pressure in a rising debt, inflation, or cash rate environment.
At the end of the day though the basics of share market investing remain the same irrespective of the macroeconomic environment.
As you have to find quality companies on good valuations.
One to consider is founder-led automotive business ARB Corporation Limited (ASX: ARB), although I still like one of its automotive peers for capital and dividend growth potential in the years ahead. Read on below to find out a little about one of my favourite stocks to buy now….
