In recent weeks, the financial news chatter has turned to resurgent inflation and the spectre of higher interest rates. And when interest rates go up, it can put pressure on shares, particularly growth shares.
When United States Government 10-year bond yields hit 1.6% earlier in the week, global share markets sold off. In Australia, the S&P/ASX 200 Index (ASX: XJO) was no exception.
But according to the world's leading central bankers (past and present), investors' inflation concerns are ill-founded.
On Monday, former Federal Reserve chair and current US Treasury Secretary Janet Yellen dismissed the notion that President Joe Biden's US$1.9 trillion (AU$2.5 trillion) COVID recovery package would stoke inflation. (More details here.)
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Rates to remain at rock bottom levels
Yesterday, speaking at The Australian Financial Review's Business Summit, Reserve Bank of Australia governor Philip Lowe joined his international counterparts, stressing that the current record low cash rate wasn't going to rise anytime soon.
Here are a few key takeaways for investors concerned rising interest rates could impact their holding of ASX 200 shares:
The Reserve Bank is committed to continuing to provide the necessary assistance and will maintain stimulatory monetary conditions for as long as is necessary. We want to see a return to full employment in Australia and inflation sustainably within the 2 to 3 per cent target range…
An important element of our policy package is the cash rate target being set at what is the effective lower bound of 0.1 per cent. The board will maintain this setting of the cash rate target until inflation is sustainably within the 2–3 per cent range.
It is not enough for inflation to be forecast to be in this range. Before we adjust the cash rate, we want to see actual inflation outcomes in the target range and be confident that they will stay there.
Lowe added that the RBA is not only waiting for inflation to sustainably track above its target range, but also waiting for the Aussie jobs market to come roaring back.
He went on to say:
A question that investors have been grappling with recently is when will this condition for a higher cash rate be met? … For inflation to be sustainably within the 2 to 3 per cent range, it is likely that wages growth will need to be sustainably above 3 per cent…
Currently, wages growth is running at just 1.4 per cent, the lowest rate on record…
Predicting how long it will take is inherently difficult, so there is room for different views. But our judgement is that we are unlikely to see wages growth consistent with the inflation target before 2024.
This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.
There you have it.
If you've anxiously been watching your ASX 200 shares rise and fall on the back of shifting speculation surrounding rising interest rates, you may want to give it a rest, "until at least 2024".
ASX 200 snapshot
At the time of writing, the ASX 200 is down 0.12% for the day and is now up 1.8% in 2021.
Over the past 12 months the ASX 200 as gained 17.3%.
