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The RBA gives ASX 200 shares a slither of good news on a down day

The Reserve Bank of Australia (RBA) has given ASX 200 investors a reason to smile even as they face a…
The post The RBA gives ASX 200 shares a slither of good news on a down day appeared first on The Motley Fool Australia. –

The Reserve Bank of Australia (RBA) has given ASX 200 investors a reason to smile even as they face a mounting wall of worry.

Our central bankers followed newly installed NSW premier Dominic Perrottet by promising stability as they held the cash rate steady at the record low of 0.1% at today’s monthly meeting.

If anything, the RBA was unwavering and stuck to its tapering and interest rate plan even in the face of the COVID-19 delta outbreak.

RBA rate decision gives Delta the flick

RBA Governor Philip Lowe media release opened with the impact of delta on the Australian economy. But he didn’t appear to be concerned.  

“This setback to the economic expansion in Australia is expected to be only temporary,” said Dr Lowe.

“As vaccination rates increase further and restrictions are eased, the economy is expected to bounce back.

“Many businesses are now planning for the easing of restrictions and confidence has held up reasonably well.”

RBA gives ASX 200 shares a boost

The RBA did flag that the timing and pace of the recovery is hard to pin down. But it believes that our economy will start growing again in the current quarter.

Our central bankers are so unconcerned that it kept to its quantitative easing (QE) tapering timeline. They maintained the 10 basis points target for the April 2024 Australian Government bond and recommitted to purchase government securities at the rate of $4 billion a week until at least mid-February 2022.

The board’s optimism initially gave the S&P/ASX 200 Index (Index:^AXJO) a modest boost. But ASX 200 shares surrendered these gains to close 0.4% in the red on Tuesday.

The RBA divergence

The RBA’s steady as she goes approach to monetary policy stands increasingly at odds with other central banks. The Reserve Bank of New Zealand is tipped to start hiking interest rates at its meeting tomorrow. The US Federal Reserve has also started talking about raising rates as early as next year.

The pick-up in economic growth is one reason why these central bankers are more hawkish than the RBA. But the increasing risk of persistent inflation is another factor.

The RBA is unconcerned about inflation, despite some warning signs like the ongoing surge in energy costs.

“Wage and price pressures remain subdued in Australia,” said Dr Lowe.

“In underlying terms, inflation is running at around 1¾ per cent and wages, as measured by the Wage Price Index, are increasing at just 1.7 per cent.

“While disruptions to global supply chains are affecting the prices of some goods, the impact of this on the overall rate of inflation remains limited.”

Foolish takeaway

Economists will be praying that he’s right. Being caught behind the inflation eight ball will be a disaster for Australia as its difficult to control once the genie is out of the bottle.

Regardless, the divergence between the RBA and its global peers is almost certain to keep the Australian dollar on the back foot.

This is happening just as international holidays are starting to look like a distinct possibility again. Talk about bad timing.

The post The RBA gives ASX 200 shares a slither of good news on a down day appeared first on The Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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.

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