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How the RBA is refuelling this ASX bull market

Bull market
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Investors have a lot more reason to be feeling confident about the ASX bull market as our central bank has given the green light on risk-taking.

The Reserve Bank of Australia (RBA) governor Philip Lowe has effectively given banks permission to opened the lending floodgates to home buyers in a speech last week.

The RBA also isn’t worried about property bubbles as it regards the COVID‐19 recession a bigger threat to our economy.

Industry watches are expecting mortgage lenders to step up their war for market share as a result, reported the Australian Financial Review.

RBA gives green light for bull market run

Dr Lowe’s speech may have been aimed at the property market. But make no mistake, this carries implications for ASX investors.

You only need to examine his commentary that interest rates will stay low for at least three more years to understand the significance.

Our central bank head won’t lift interest rates until actual inflation, not forecast inflation, reaches the RBA’s target of 2% to 3%.

Shock change to inflation targeting

This may sound like a very subtle difference, but it isn’t. The RBA is effectively saying it doesn’t mind inflation jumping above its target band because that is what will likely happen.

Monetary policy (meaning interest rates) is a blunt instrument as the impact of a rate change won’t be felt in the real economy for some time.

If the RBA waits till inflation actually hits 2-3% before lifting acting, there is a very good chance inflation will overshoot before the impact of higher interest rates kick in.

Monetary policy on steroids?

Concern about runaway inflation is one of the things that would normally hold back a central bank. With this caveat removed, the RBA is putting the pedal to the metal as it prepares to cut rates again next month.

The cut to the official cash rate to 0.1% will supplement a step-up in the RBA’s quantitative easing program of buying bonds.

If you remember, its the flood of liquidity (cheap money) that helped trigger a 36% rebound in the S&P/ASX 200 Index (Index:^AXJO) from its COVID low in March.

Be ready to pedal on a fresh wave of liquidity that’s unrestrained from worries about asset bubbles or inflation risks.

Inflation could be bigger risk than you’d think

But things could turn ugly quicker than you’d think even though no one here is worried about inflation.

Some economists are starting to wake up to the inflation risks facing the US as the property market heats up and the US dollar stays on the back foot. It won’t take long for US inflation to reach our shores given how interconnected global financial markets are.

Foolish Takeaway

The problem with inflation is that once that genie pops out of the bottle, getting it back in is a difficult task.

Right now though, inflation is seen as the lesser of all COVID evils. We might as well climb on our surf boards and enjoy the bull market ride fellow Fools.

We’ll worry about paying the piper later.

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Returns As of 6th October 2020

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

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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