With the Reserve Bank of Australia (RBA) cutting rates again on Tuesday, we are now in uncharted territory in term of monetary policy. I say this because, in our country at least, interest rates have never been so low (ever) and our RBA has never been so dovish. This was the second cut in a row, which is unusual in itself, and it has left our cash rate at exactly 1%.
So why is our government doing this? Rates didn’t even get close to being this low in the aftermath of the global financial crisis (GFC), so it is interesting that we are seeing these lows now. Traditionally, monetary policy (read: interest rates) is a weapon to be used against an economic crisis. During the GFC, interest rates were slashed quickly and deeply to combat the falling demand in our economy and many economists credit our economy’s outstanding performance in during the GFC to this deployment of monetary policy. But now, we see that our RBA is pre-emptively using our ammunition, even though there is (apparently) no cause for concern. I believe at least part of the answer lies overseas.
During the GFC, the United States (US) government didn’t have nearly as much room to cut as we did and they hit zero interest rates very quickly. As a lot more was clearly needed, the US Federal Reserve hit the ‘nuclear button’ and began what’s now known as ‘quantitative easing’ (QE), or money printing in layman’s terms.
Most experts agree that these QE programs have helped push the US stock market to new all-time highs recently, after a decade of spectacular recovery. QE led to huge amounts of cash flowing through the US economy, and as cash and bond rates remained in the doldrums, this money flowed into stocks and property.
What does this mean for Australia?
I believe that our RBA has seen this happen in the US and is keen for Australia to follow suit. In my opinion, this program of rate cuts is likely to lead to our own version of QE at some stage (especially if there is a crash of some kind) and this will result in a further inflation of income-producing assets like shares and property.
So yes, I believe the government (specifically the RBA) is happy to encourage us to break that last term deposit and go all in with shares. Credit has never been cheaper, and saving has never been less rewarding. What this means for the future, I’m not sure. But if the RBA gets its way, the sharemarket is set for some more big gains going forward.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.