So far this year, we’ve seen the Reserve Bank of Australia (RBA) slash rates twice to their current record low of 1.00% per annum.
These rate cuts have arguably boosted the economy higher and delayed any looming recession, which in turn has helped the S&P/ASX200 Index (INDEXASX: XJO) climb more than 20% higher since the start of the year.
While many are asking just how low we can go, it’s a good time to look at where monetary policy is sitting as we near the end of 2019.
What’s happened so far in 2019?
In line with many of the central banks around the world, the RBA has cut rates lower as it looks to boost headline inflation figures and keep the economy humming for another year.
Keeping inflation within its target range of 2-3% per annum is one of the core jobs of the RBA, one that has been made more difficult by the Federal Government’s intense focus on a budget surplus.
Despite significant expectations that 2019 would be the year of quantitative tightening – whereby central banks would begin reversing the effects of the quantitative easing programs from mid-GFC – it has in fact proven to be the opposite.
Volatility in global markets has seen the likes of the European Central Bank (ECB) and U.S. Federal Reserve cut rates with the former also reinstating its 20 billion euro (A$32.4 billion) per month asset buyback programme to keep its currency stable.
The RBA has operated in much the same vein, cutting rates in both June and July by 25 basis points (bps) from 1.50% to just 1.00% and sending us further into record-low interest rate territory.
Where are interest rates headed in 2020?
Given the Coalition has been returned to government and we will no longer be in an election year, arguably there should be less scrutiny on the RBA, allowing it to do what it does best and manage monetary policy.
Domestic inflation data has been soft for quite some time and given we have seen particularly strong labour data I’d think that further rate cuts in 2020 remain a strong possibility.
Many economists are predicting we’ll close the year with interest rates at 0.50% per annum with 2 more cuts to come before Christmas with much of the language used by Governor Philip Lowe and Co. suggesting rate cuts are on the cards.
What does this mean for my ASX portfolio?
If theory and history are to be believed, rate cuts should mean that investors are willing to borrow more money cheaply and spend more, boosting economic growth and the earnings of our favourite ASX companies.
In my view, further rate cuts should be good for Aussie property meaning it could be worth looking at Mirvac Group (ASX: MGR) as a residential and commercial real estate developer which could borrow for cheap and sell for more to cashed-up and hungry buyers.
I’d personally be steering clear of the big banks if the rate cuts do eventuate in 2020, given it could be hard to maintain current profit margins if they’re lending off a very low base rate and still reliant on offshore funding for their own funding needs.
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Motley Fool contributor Kenneth Hall 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.
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