The Reserve Bank of Australia has announced that interest rates will remain on hold at 2 per cent for at least one more month.
The decision was widely expected. According to the Business Spectator this morning, the market was pricing in a mere 7 per cent chance of an interest rate cut today, so there certainly weren't any surprises.
Still, there are ongoing concerns regarding China's growth prospects and how that could then impact Australia's own economy. These issues have led to numerous calls from economists for further interest rate cuts, with analysts from various institutions suggesting the cash rate will fall as low as 1.5% in 2016. Some say the first rate cut will come when the RBA meets next month on Melbourne Cup Day.
In today's announcement, the RBA referred to the market's recent volatility, which is just one of the reasons investors are lobbying for another interest rate cut. The RBA said that the volatility had not affected "the functioning of financial markets".
At the same time, we have experienced stronger growth in employment and a steady unemployment rate. Meanwhile, inflation remains consistent with the target of 2 per cent to 3 per cent per annum, albeit at the lower end of that range which could provide the scope for further easing down the track.
How the market reacted
The Australian dollar rose roughly 0.4% to US 71.11 cents immediately after the announcement was made, while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) retreated, led down by some of the nation's biggest dividend stocks.
That includes companies like Telstra Corporation Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA) and, perhaps unsurprisingly, BHP Billiton Limited (ASX: BHP) which also boasts a monstrous fully franked dividend yield.
The decision is a good sign for the Australian economy. Their judgement reiterates that there is nothing to be immediately concerned about for the local economy, whilst also maintaining their fire power in case conditions do worsen.
Meanwhile, although dividend investors might be somewhat disappointed about the RBA's decision, it is clear that interest rates are set to remain low for the foreseeable future. With the local sharemarket sitting at just 5,180 points, now could be an excellent time to stock up on some of the country's best dividend payers.
