The Reserve Bank of Australia (RBA) has started to slow down its bond buying. It will be interesting to see how this affects ASX shares.
RBA’s latest decision
The Australian central bank said that it was keeping its interest rate at 0.1% and planned to keep it there at some point.
However, the RBA is going to slow down its bond buying. The amount it’s going to buy until at least November is $4 billion per week, down from $5 billion from week. This will be reviewed in November.
According to reporting by the Australian Financial Review, Dr Lowe said the bank was responding to the stronger-than-expected economic recovery and improved outlook but emphasised the lower rate did not “represent a withdrawal of support” and the bank would keep buying bonds until there was material progress towards its inflation target.
Dr Lowe said: “Because the inflation and wage outcomes have been lower than other places, we’re going to keep stimulus going probably longer than other countries.”
The RBA has been looking at the stronger jobs market in Australia, it’s expecting wages and inflation to increase over the coming months. But it said that it doesn’t expect inflation to remain strong for the longer term and increasing rates would “likely to require wages growth above 3%”.
It would need inflation to above 2% for a number of quarters before normalising monetary policy and lifting interest rates above the current lows. The RBA doesn’t think the conditions will be bet before 2024, though Dr Lowe said things could change and there may be a situation where rates could lift earlier in 2023.
Dr Lowe said, according to the AFR, that “meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.”
He also pointed to the border opening as another factor that could push up wages.
Thoughts of the impact on ASX shares
A slight change of the interest rate isn’t likely to have a large impact on the operations of many ASX shares.
But it’s the valuations of those businesses where it could make the biggest impact. There are some economists that think interest rates will rise sooner.
Magellan Financial Group Ltd (ASX: MFG) has this Warren Buffett quote from the 1994 Berkshire Hathaway annual general meeting (AGM):
“The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature … its intrinsic valuation is 100% sensitive to interest rates.”
It’ll be interesting to see what happens next and I’ll have my eyes open for more opportunities in volatility, whether they’re ASX dividend shares or ASX growth shares.
