As was widely expected by the market, the Reserve Bank of Australia elected to leave the cash rate unchanged at 0.75% at its December meeting.
Why did the Reserve Bank keep rates on hold?
According to the statement by Governor Philip Lowe, the Reserve Bank saw no need to make any changes at this point and believes the Australian economy has “reached a gentle turning point.”
Governor Lowe explained that the central bank expects economic growth to pick up gradually to around 3% in 2021.
This is expected to be driven by the “low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices and a brighter outlook for the resources sector.”
Though, he did note the uncertainty around the outlook for consumption. This is being caused by a “sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.”
Also causing uncertainty were the effects of the drought and the evolution of the housing construction cycle.
What about inflation?
Despite its expectation for wage growth to remain subdued for some time to come, the Reserve Bank has forecast inflation to gradually pick up.
However, both headline and underlying inflation are expected to only be “close” to 2% in 2020 and 2021.
Close to 2% is unlikely to be enough for rates to move higher, which means income investors may need to deal with ultra-low rates for at least a couple more years.
The final paragraph is often the most important with monetary policy statements. This month it concluded:
“Given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting while it continues to monitor developments, including in the labour market. The Board also agreed that due to both global and domestic factors, it was reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
If the Reserve Bank does ease monetary policy further in order to support sustainable growth, full employment, and the achievement of its inflation target, then the interest rates on offer with term deposits and savings accounts could go even lower.
This could make it worth considering investments in dividend-paying shares like Sydney Airport Holdings Pty Ltd (ASX: SYD), Telstra Corporation Ltd (ASX: TLS), and Transurban Group (ASX: TCL) ahead of traditional interest-bearing assets.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited, Telstra Limited, and Transurban 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.
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