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What you need to know about the RBA’s rate decision today

RBA
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The Reserve Bank of Australia (RBA) has good news for ASX investors but not so good news for workers.

Our central bank believes it will need to keep pumping liquidity into the market and the job market won’t be firing on all cylinders for at least three years.

Equity markets have developed an unhealthy addiction to monetary stimulus and this is one of the key reasons that have sent stocks soaring since March.

RBA to act as safety net for ASX stocks

The S&P/ASX 200 Index (Index:^AXJO) surged 45% since the COVID‐19 market low and investors will keep partying into 2021 as the RBA isn’t showing any signs of removing the punch bowl.

While RBA Governor Philip Lowe kept the current policy settings, the Reserve Bank appears to be resigned to the fact that it will need to do the heavy lifting over the next few years.

Job market the Achilles heel

Dr Lowe acknowledged that global news has been mixed. Infection rates have soared in Europe and the United States and their economies are suffering as a result.

On the other hand, a number of COVID vaccines are showing promise and their widespread use will reinvigorate the global economy.

“The recovery is also dependent on ongoing support from both fiscal and monetary policy,” said Dr Lowe.

“Hours worked in most countries remain noticeably below pre-pandemic levels and inflation is low and below central bank targets.

“The extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years.”  

Why some inflation is desirable

So, while a rebound in recent job ads here is a cause for celebration, Australia remains stuck in a low growth world. This was a similar situation pre-COVID, although the pandemic has pushed back hopes for a return of “good” inflation for at least three years.

You will be forgiven to think that inflation is a bad thing as no one likes paying higher prices for things. But we need some inflation to get wages growth and the sweet spot, in the RBA’s view, is between 2% and 3%.

No growth without inflation

We won’t see those types of numbers for a while yet. The central bank is forecasting inflation of just 1% in 2021 and 1.5% the year after.

“The Board views addressing the high rate of unemployment as an important national priority,” added Dr Lowe.

“Its policy decisions over recent months will help here. These decisions are complementary to the significant steps taken by Australian governments to support jobs and economic growth.”

Why ASX investors are the lucky bunch

At least on the gross domestic product (GDP) front, we might not need to wait as long for conditions to return to what they were before COVID.

The RBA’s central scenario predicts GDP will recover to the levels at the end of 2019 by the end of 2021.

As I mentioned at the start, ASX investors have much more reason to feel optimistic about the future than other Aussie battlers.

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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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