Today’s minutes from the Reserve Bank of Australia’s monetary meeting show it remains dovish or with an inclination to cut rates further if it feels it needs to support employment and sustainable growth.
In conclusion to its meeting the RBA noted: “Lower interest rates would provide more Australians with jobs and assist with achieving more assured progress towards the inflation target. The Board would continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
Given Australian and US share markets are touching record highs, while the government has pledged to slash income taxes as its trade surplus sits at a record high (measured as a share of GDP) on the back of an iron ore price that has doubled in 12 months, you won’t find more rate cuts in the economic textbooks.
However, the RBA has already delivered two cuts in the last two months and justifies its inclination to potentially cut again as inflation is still consistently running below its targeted 2% to 3% targeted range, while a range of other data shows the Australian economy has slowed down drastically over 2019.
Since the RBA’s meeting the US Fed’s chair, Jerome Powell, has also indicated investors can expect a rate cut from the world’s most powerful central bank soon. This after Mr Powell was seemingly encouraged by President Trump to take a more Machiavellian approach to monetary policy.
The European Central Bank’s governor is also famously on the record as saying it will do “whatever it takes” to support its ailing economies as feeble inflation persists and government debt commonly offers investors negative yields. Japan is also perhaps the most famous example of a stagnant economy where share markets have gone sideways for decades.
Therefore the race to the bottom in lending rates globally means the RBA may feel more inclined to act again.
So for Australian share market investors the prospect of another rate cut will provide a short-term sugar hit, but shouldn’t disguise the fact that the local economy, excluding the resurgent mining and energy sector, is struggling.
House prices are almost certain to be supported by recent prudential and monetary moves including the decision by APRA to loosen credit by scrapping the 7% loan serviceability assessment imposed on banks, although this might not be enough to offset other macro problems associated with ultra-low rates hitting the banks.
Therefore popular shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) might only go sideways at best over the next few years.
While other dividend favourites in the REIT and infrastructure space may continue to benefit. Stocks to watch include Goodman Group Ltd (ASX: GMG), Scentre Group Ltd (ASX: SCG) and toll road provider Transurban Group (ASX: TCL).
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The Motley Fool Australia owns shares of and has recommended Transurban Group. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Scentre Group. 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.