The Reserve Bank of Australia released the June minutes of its meeting on monetary policy today and told investors to get ready for another cash rate cut or two ahead.
Of course the bank cannot directly state that another rate cut is coming as that decision to an extent depends on unknown future economic data, but its statement today should leave investors in little doubt as to its intentions.
Below is the key sentence on the expected rate direction from today's minutes on its June 4 policy meeting.
"Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead."
The news immediately sent the Australian dollar marginally lower as currency markets have largely priced in another two rate cuts in 2019, although that's not to say the local dollar will not continue to slide lower through 2019.
Especially if we consider investors may be over-estimating the likelihood of the U.S. Fed coming to the rate cut party in 2019.
For local investors more rate cuts will probably help send the market higher and I'm talking about growth and dividend stocks.
The latter because lower cash rates are likely to intensify the hunt for yield among savers left with few options other than taking on more risk in the share market.
While growth style shares will benefit as rate cuts bring more liquidity or 'spare cash' into the economy which will eventually find its way into stocks valuations.
Lower cash or risk free rates also mean capital market investors are prepared to take on more risk in search of higher returns which will translate into higher valuations for any business expected to grow at a decent rate into the future.
Already we have seen dividend favourites such as Telstra Corporation Ltd (ASX: TLS) and Transurban Group (ASX: TCL) hit record highs recently, while popular growth shares like Wisetech Global Ltd (ASX: WTC) and Appen Ltd (ASX: APX) are also near record highs.
Investors should be careful though to remember that a business like Telstra may have to cut its dividend again in the years ahead, which would likely mean buying it today is a mistake.
