We tend not to pay much attention to the monthly Reserve Bank of Australia (RBA) meetings.
Before they’ve met, we know what they’ll say.
It’s obvious. We’ve explained this to you for a long time now.
Interest rates are low and they’re staying low.
Does anyone really expect the RBA to start raising rates?
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It seems some people do. And yet yesterday the RBA confirmed it had absolutely no intention of raising rates. And by extension that can only mean one thing for investors…
Do you remember the fallout from the 2008 financial meltdown?
Banks, companies, investors and governments had gotten into a big pickle with too much debt.
A lot of folks couldn’t pay back what they owed.
It caused a run on the financial system.
Things looked really bad.
So governments and central banks came up with a ‘clever’ solution to the problem of too much debt — they decided to issue even more debt.
Genius.
The solution is the problem
Well, now the central banks and governments are at it again.
Except this time the focus isn’t on debt; it’s on debt’s cousin — interest rates.
Western central banks have held interest rates at a record low for nearly six years.
That’s a long time. And they know it too.
They also know that holding rates low for that long will have unintended consequences. It will cause people, businesses and governments to go into too much debt.
It will cause people, businesses and governments to invest inappropriately.
And it will cause people, businesses and governments to buy and build things on the assumption that interest rates will stay low for a long time.
The central banks know this.
So what else can they do…other than keep interest rates at record lows?
The solution to the problem of low interest rates is even lower interest rates.
Failure to do that will mean the rising cost of debt and increased difficulty in servicing the debt. That goes for individuals, businesses and governments.
That’s why yesterday the RBA, in effect, told investors not to worry about interest rates going up, because they won’t.
By extension the message was: buy stocks.
Three more years of low interest rates…at least
Here’s what the RBA said in its monthly statement after the interest rate decision:
‘There has been some improvement in indicators for the labour market this year, but it will probably be some time yet before unemployment declines consistently. Recent data showed an increase in inflation, with both headline and underlying measures affected by the decline in the exchange rate last year. But growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate.’
If that doesn’t convince you interest rates are staying low, the Reserve Bank of Australia wraps a ribbon around it with these comments:
‘Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
‘In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.’
We can’t see how anyone can interpret those statements any other way.
The RBA isn’t even asking you to read between the lines. It’s right there…on the lines — the bank predicts inflation of 2–3% over the next two years, along with a period of stable interest rates.
If that doesn’t mean interest rates are staying at record lows for at least the next three years, then we don’t know what does.
Staying on target for ASX 7,000 in January 2015
As if to ram home the point, the RBA noted that ‘Savers continue to look for higher returns in response to low rates on safe instruments.’
The language and tone of the written word is telling. It’s completely matter-of-fact.
There’s not a single word of warning. The RBA is simply telling it how it is. There’s a simple reason why the RBA isn’t warning investors about looking for higher returns.
It’s because that’s exactly what they want.
Remember the importance of relative yields in investing. Once a yield in one asset class starts to move, it can have an impact on yields in other asset classes.
The RBA can control interest rates to some degree. But it can’t directly control dividend yields. It can only control them indirectly by making interest rates so low that investors look for higher yields elsewhere — such as in stocks.
But if investors start to become cautious about stock investing and sell, it could force up dividend yields. That would cause a rebalancing in other investments. It could attract investors from bonds. That would cause bond prices to fall and bond yields to rise.
And while everything could reach equilibrium, it would cause some volatility and uncertainty in interest rates.
That’s something no central bank wants at the moment. They want stable inflation, stable prices, stable wages, stable interest rates, and a gradually rising stock market and housing market.
It’s all there…it’s all in the RBA’s statement.
The RBA is telling you that interest rates aren’t going anywhere. In fact, it’s going one step further by giving away its intentions to keep interest rates low for another three years.
Just when some thought our 7,000-point target for the S&P/ASX 200 was dead, the RBA comes through to ‘save’ the day!
Cheers,
Kris+
The post The RBA’s Message for Investors: ‘Buy Stocks’ appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
