RBA Holds Rates Once Again
It comes as the central bank reduces economic stimulus in face of pandemic.
It comes as the central bank reduces economic stimulus in face of pandemic.
In today’s RBA announcement, Dr Philip Lowe announced that the board decided to hold interest rates at record low levels of 0.1%.
This is in line with its firm want to maintain the target of 10 basis points for the April 2024 Australian Government bond.
The central bank is sticking to its plan of reducing economic stimulus – in the form of weekly bond purchases – from $5 billion to $4 billion per week, despite the impact of the lockdown.
Elsewhere, Dr Lowe pointed to the housing market’s continued strength stating “with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors.”
“The Bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained,” added Lowe.
The RBA pointed out the economic outlook of the coming months is dependant on the evolution of the current COVID situation and the containment measures. However, Lowe also indicated that its modelling is based on a significant share of the population being vaccinated by the end of this year.
“The labour market has recovered faster than expected, with the unemployment rate declining further to 4.9 per cent in June. Job vacancies have remained at a high level and there are reports of labour shortages in parts of the economy,” Dr Lowe said in the statement.
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But leading Australian economist says there are five reasons for investors to be optimistic about the future
A 291-point or 3.69 percent dive in the benchmark ASX 200 index over April has all but wiped out the Australian share market’s gains for 2024. There was a 140-point or 1.81 percent drop in the ASX 200 on Monday and a minor further fall yesterday. The Australian market has followed the US lead this month, with the S&P 500 also down significantly, losing 232 points or 4.42 percent since 1 April.
The catalysts include last week’s hotter-than-expected US inflation data. Although analysts think Australian inflation is unlikely to follow suit, stickier-than-expected inflation in the US may delay the first interest rate cut by the US Federal Reserve. As the US is the world’s largest economy, this may have implications for central bank decisions in other nations like Australia.
“ … uncertainty over when the Fed will start to cut rates has been increased by three worse than expected monthly CPI inflation results in a row …,” said AMP chief economist Dr Shane Oliver. “This has seen money market expectations for 0.25 percent rate cuts this year scaled back from seven starting in March this year to now less than two starting in September. And in Australia they have been scaled back from nearly three starting in June to no rate cut until late this year/early next.”
On top of that, Iran’s retaliatory strike on Israel and Israel’s insistence that a response will be forthcoming despite many Western nations’ objections have made investors nervous. If Iran were to become more involved in the ongoing war, this may have ramifications for oil prices.
“Another sharp spike in oil prices would be a threat to the economic outlook as it could boost inflation again … potentially resulting in higher than otherwise interest rates and act as a tax hike on consumers leaving less to spend on other things,” Dr Oliver said.
Also, in Australia, the pandemic savings buffers people have been using to cope with the cost of living crisis are being depleted and China’s weak property sector is impacting demand for iron ore. All of this makes shares vulnerable to a pullback amid stretched valuations and more trading volatility ahead, Dr Oliver said.
On balance though, Dr Oliver thinks an upward trend is likely to remain for shares. “From their lows last October, it has been relatively smooth sailing for shares – with US shares up 28 percent, global shares up 25 percent and Australian shares up 17 percent to recent highs.”Dr Oliver said the past few weeks have “seen a rough patch” but the share market is likely to continue its bull run.
Markets have been strong since November 2023 due to falling inflation and optimism that the interest rate cycle is at its peak. Many economists have expressed surprise that the jobs market in many Western countries has remained strong despite weaker economic conditions. Some are terming this “immaculate disinflation” because it goes against the traditional trend of many people losing jobs when economies slow down.
In this climate, Dr Oliver recommends that investors stick to an appropriate long-term investment strategy and accept that share market pullbacks are “healthy and normal”.
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