The RBA expects cheap money to remain. What does that mean for stocks?

The RBA minutes for its March meeting just came out. Let’s take a closer look at what it said and what that means for your investment portfolio.
The post The RBA expects cheap money to remain. What does that mean for stocks? appeared first on The Motley Fool Australia. –

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Since the beginning of 2021, the S&P/ASX 200 Index has increased 160.7 points or 2.4%. Today, the index is up 1.06% on yesterday’s close. Part of the reason for the booming share market is the flow of cheap money, driven by the RBA.

The central bank has been looking for ways to steer the Australian economy away from another recession. Additionally, it is also aiming towards longer-term growth. In normal times, it would have a relatively light touch – leaving the proverbial ship on autopilot and all making small adjustments when necessary.

However, we’ve been in unchartered waters for over a year now – overwhelmed by the tidal wave that is COVID-19. Even before the pandemic, economic indicators were not strong.

Philip Lowe and the RBA Board concur. Minutes from the March meeting can summarise the mood on the Australian economy as optimistic. While signs of recovery from COVID abound, the RBA still sees many economic icebergs on our voyage.

Let’s take a closer look at the minutes and what they might mean for your investments.

Quantitative Easing to continue

Last month, the board declared it would continue quantitative easing (QE) after April 2021. The initial $100 billion was reserved for the purchasing of government bonds and was due to be exhausted then. Another $100 billion has been allocated and “the Bank is prepared to do more [QE] if that is necessary.”

The central bank believes its policies. In addition to government programs like JobKeeper and HomeBuilder. Both of these programs have contributed to a more robust Australian economy than expected under the circumstances. In 2020, GDP fell by 1.1%.

The ending of JobKeeper at the end of this month was touched on in the meeting. In the view of the board, the cessation of the wage subsidy program will NOT result in a sustained increase in unemployment. It does believe many, including the self-employed, will see a fall in income. The bank based this assessment on the recovering job market. Additionally, it factored in future indicators, “such as job advertisements and vacancies.”

Inflation, wage growth, well below target. Stock market to continue surge

The RBA also affirmed in its forecast that it did not see the official cash rate rising above 0.1% until at least 2024. The board cited weak wages growth and below-target inflation (2-3% is the RBA’s preferred inflation rate) for the forecast. It believes there is still room for more employment in the labour market. Furthermore, until such time as employment materially increases, wages will not grow. The central bank does not believe inflation will materially pick up until wage growth strengthens.

It did note, however, that the consumer price index (CPI) would see a bounce of 3%. This is predicted to come as life returns to normal post-coronavirus. In saying that, the RBA believes inflation will remain below the 2% target over “both 2021 and 2022.”

In these discussions, the RBA is well aware of the effect low-interest rates is having on both financial and housing markets. Quoting from the minutes:

[Board members] acknowledged the risks inherent in investors searching for yield in a low interest rate environment, including risks linked to higher leverage and asset prices, particularly in the housing market. Members noted that lending standards remained sound and that it was important that they remain so in an environment of rising housing prices and low interest rates.

The Board concluded that there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets.

In other words, the benefits of low-interest rates outweigh the risks of an inflated stock and housing market.

All signs bode well for stock-market investors in the short-term. One beneficiary of a hot property market would be real estate investment trust shares.

The minutes also indicated the RBA were very unlikely to move to a negative cash rate (i.e., an official interest rate below 0%).

Rising bond yields and the stock market

In the meeting, the bank also discussed rising bond yields. The share market has fluctuated widely with rising bond yields and evolving market inflation expectations. While it noted market expectations on inflation and its effect on the bond market, it still believes the case for stronger inflation is weak.

The S&P/ASX All Technology Index is the most susceptible to rising bond yields. This is because as bond yields rise, investors sell riskier assets (like tech shares) and buy safer ones (like bonds). If bond prices fall because market expected inflation never materialises, as the RBA believes, bond-yields are likely to fall. If bond-yields did fall, it would not be unwise to assume that would reflect positively on technology shares.

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Motley Fool contributor Marc Sidarous has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post The RBA expects cheap money to remain. What does that mean for stocks? appeared first on The Motley Fool Australia.

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