RBA holds rates and reports inflation "is likely to remain low for some time"

Should you worry about rising rates sending your share portfolio plunging?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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….

Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. You can find Tom on Twitter @tommyr345 The Motley Fool Australia has recommended ARB Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »