ASX share market fears ease as RBA’s inflation target proves difficult to hit

Higher wages needed for rate increase…

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A businessman pushes a giant percentage sign down, indicating eforts to keep inflation in check

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The S&P/ASX 200 Index (ASX: XJO) has quickly bounced back as investors buy up ASX shares following a speech from the RBA Governor this morning.

Philip Lowe discussed the economy’s transition from recovery to expansion phase at the Australian Farm Institute Conference in Toowoomba.

While there was plenty of information, the market had its ears on the governor’s commentary around inflation.

Stubborn inflation

In his speech, Lowe discussed what the future may look like as the Australian economy takes its next steps forward.

Although employment is now 1% above pre-COVID levels and GDP growth has rebounded strongly, the governor insisted that it’s important not to lose sight of the challenges being faced.

While unemployment has retreated, wage growth continues to remain elusive. Lowe noted that the RBA had not seen any serious movement in wages or inflation despite improvements in economic data.

Reportedly, businesses have felt as though increasing prices is not an option due to the competitive environment. As a result, the focus had instead shifted towards cost-cutting to achieve increased profits.

This mindset can be helpful in making businesses more efficient, but it also has the effect of making wages and prices less responsive to economic conditions.

Investors are breathing a sigh of relief following the RBA’s comments. In contrast, the US Federal Reserve last night found that inflation had come in ahead of expectations in the last few months. The remarks sending warning signals across equity markets.

Fuel for ASX shares

Today’s speech continues the RBA’s position on maintaining a low-rate environment until early 2024, at the earliest. This gives added confidence in equities, as borrowing for leveraged investments remain low and the return on cash remains unattractive.

ASX-listed tech shares have particularly gained a boost out of today’s dovish comments. At the time of writing, the information technology sector is 1.08% higher.

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