The S&P/ASX 200 Index (XJO) popped up 0.9% today after touching an 11-month high this morning of 6852.9, and the financials sector was a major driver.
Financials sector continues its rally
The financials sector is presently powering up 1.82%. It's the third consecutive day that the sector has been on the rise.
Australia and New Zealand Banking Grp Ltd (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) all posted gains of between 1–2%for the day.
The Australian Financial Review reported that the rally of the big four banks has collectively added $8 billion in market capitalisation today alone.
According to Nasdaq, the financials price jump can be put down to the central bank's upbeat economic outlook, as the market responded to Reserve Bank of Australia (RBA) governor Philip Lowe's latest update.
Reserve Bank reiterates quantitative easing
In his speech, governor Philip Lowe reiterated that quantitative easing (QE) has been an effective mechanism to lower interest rates and keep the Australian dollar lower than it would otherwise be.
Dr Lowe also announced that the RBA will hold the official interest rate at 0.1% for now. This is with the aim of reaching an inflation target of 3%.
Dr Lowe added that he doesn't expect this target to be reached until 2024.
With the QE outlook extended, it means that the banks can keep selling securities back to the central bank. These sales create liquidity for the banks, which can potentially support issuing more loans and offering more products.
Does quantitative easing mean that bank share prices go up?
Put simply, no. QE supports low-interest loan environments, however, demand is impossible to predict. QE does not guarantee the banks, or any other business, a strong financial performance.
While the banks continue to work in the QE environment going forward, the RBA will no doubt be keeping its eye on the inflation rate with hope that its current policy approach continues to bolster the Australian economy.
