10 Sep 2021
RBA Update - September 2021
Article provided by PSK's Chief Investment Officer Chris Lioutas.
The Reserve Bank of Australia held its September meeting this week with both some changes to rhetoric and the status quo.
The September decision involved maintaining a Cash Rate at emergency levels of 0.1%, maintaining the target of 0.1% on the April 2024 maturing Australian Government bond (through their operations), and continue to purchase government securities but at a reduced rate of $4 billion a week (down from $5 billion a week) and maintain the purchases at this new rate until at least mid-February 2022.
All of this is still very supportive of the economic recovery, and particularly supportive for asset price growth considering very low yields on defensive assets like cash and bonds, low borrowing rates for investment, and plenty of excess liquidity being pushed into the economy by the Bank’s bond buying operations seeking a return at least above inflation.
The Bank contrasted the pre-Delta outbreak economic recovery effort, which had been progressing strongly, to the economic situation we now found ourselves in, with economic growth expected to decline materially in the September quarter and likely impact the December quarter as well given the uncertainty about the timing and pace of the “bounce-back” which will be highly dependent on the health situation and government’s policy response.
The Bank also touched on labour market conditions and the housing market specifically. On the labour market, front that expect continued weakness with a likely uptick in unemployment in the short term and delayed wages growth recovery for some time. On the housing market, although prices continue rise, turnover in some markets has declined following increased virus concerns. They continue to monitor borrowing trends carefully and re-emphasised the importance of lending standards.
The Bank signed off with a commitment to maintaining policy support until actual inflation is sustainably between their target (2-3%), which they don’t expect to be met until at least 2024.
What does this mean for markets and portfolio settings?
As indicated above, the very supportive policy stance is likely to remain in place for some time. Whilst the policy stance is squarely aimed at supporting the economic recovery efforts, including labour market improvements and sustainable levels of higher inflation, the side-effects of such a policy stance depresses rates of return on defensive assets (cash, bonds) whilst encouraging continued investment in growth assets (equities, property, infrastructure) which will likely remain well supported from here.
However, we are closely watching company and asset fundamentals to ensure that earnings and actual rates of return keep pace with market prices. Any significant change in the gap between the two can spell trouble. As always, we encourage a long-term mindset, patience, and a well-diversified portfolio aligned to your risk profile and your investment time horizon.
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser
PSK Financial Services Group Pty Ltd (ABN 24 134 987 205) are Authorised Representatives of Charter Financial Planning Ltd (AFSL 234666), Australian Financial services Licensee and Australian Credit Licensee. Information contained in this article is general in nature. It does not take into account your objectives, needs or financial situation. You need to consider your financial situation before making any decisions based on this information.