One of the biggest investing themes of 2019 was the three interest rate cuts that the Reserve Bank of Australia (RBA) delivered. The cash rate started last year at 1.5% (then a record low). But a triple whammy of cuts saw us end the year at 0.75%, where we stand today.
ASX investors have a lot to thank the RBA for as we start 2020. Those rate cuts would have been a huge contributing factor to the record year of returns that we saw from ASX shares last year. The S&P/ASX 200 (INDEXASX: XJO) saw gains of over 20% for the year – which is highly unusual for an index that normally averages between 7% and 10%.
Anyone with a mortgage would no doubt be rejoicing too – record low interest rates have translated into cheaper mortgages (although anyone with savings in the bank is conversely feeling some pain).
Where to from here?
As we start a new year of investing, all eyes are once again on the RBA. It had been the prevailing consensus that we haven't seen the last of the downcycle in interest rates. Interest rate futures had priced in at least one more rate cut in 2020 and talk of an Aussie QE (quantitative easing) program has been prevalent in the last few months.
But according to reporting in the Australian Financial Review (AFR), this might have shifted.
The AFR notes that the RBA Governor Philip Lowe has declared that the three 2019 cuts have helped the economy stabilise and contributed to the improved retail sales figures that we saw in the 2019 December quarter. Although inflation is still well below the RBA's 2-3% target band and unemployment is still a touch too high for the RBA's liking, things certainly seem to be moving in the right direction.
The RBA is also likely to want to keep its powder dry. A cash rate of 0.75% as it stands doesn't offer much of a buffer against any significant future downturns in economic growth and cutting to 0.5% or lower would deplete the already weakened arsenal.
Foolish takeaway
In my humble opinion, I don't see another interest rate cut as likely unless we see a significant deterioration in economic growth (which is very possible considering the woes the bushfires and coronavirus are causing). If rates do stay on hold at 0.75%, it might mean that 2020 won't be as bountiful for share market investors as 2019 was. Back to fundamentals we go!
