The Reserve Bank of Australia (RBA) looks unlikely to change its dovish stance on interest rates after the ABS reported that its consumer price (CPI) index for a basket of common goods and services rose just 0.6% for the June quarter and 1.6% for the year to June.
Taking a glass half full approach this is an improvement on the 0% quarterly CPI growth printed in the March 2019 quarter.
ABS Chief Economist, Bruce Hockman, said: "Automotive fuel prices rose 10.2 per cent in the June quarter 2019. This rise had a significant impact on the CPI, contributing half of the 0.6 per cent rise this quarter."
For the RBA persistently feeble price inflation signals the existence of spare capacity in the economy, which is why it cut cash rates in June and July 2019. It has also flagged that it now expects a lower than previously considered unemployment rate is required to stimulate demand and put upward pressure on inflation.
The RBA is also hoping tax cuts, soaring commodity prices, and increased infrastructure / resource project investments can boost inflation.
However, critics claim it's now 'cornered' by housing due to monetary policy creating excess household leverage and this is the real reason it recently told markets to expect "an extended period of low interest rates", while it hopes inflation returns closer to its targeted 2%-3% range.
Not everyone is convinced it will without more stimulus though, with 30-day interbank cash rate futures traders putting a 30% chance on another 0.25% cut in August.
Moreover, the RBA governor himself conceded in a July 25 speech: "It remains to be seen if future growth in demand will be sufficient to put pressure on the economy's supply capacity and lift inflation in a reasonable timeframe. It is certainly possible that this is the outcome. But if demand growth is not sufficient, the Board is prepared to provide additional support by easing monetary policy further."
If we do see another rate cut the S&P/ ASX200 (ASX: XJO) could hit new record highs, with popular dividend shares like Telstra Corporation Ltd (ASX: TLS) and Westpac Banking Corp (ASX: WBC) likely to catch a bid.
I wouldn't suggest following the crowd like this in search of dividends, as there could be better risk-adjusted bets out there….
