The Reserve Bank of Australia elected to cut interest rates to a record low of 1.5% on Tuesday.
While the market expected weak inflation data would force the RBA to cut interest rates further, the actual figures – released by the Australian Bureau of Statistics last week – proved to be somewhat inconclusive. That is, they were neither weak enough to make a rate cut a 'sure thing', nor strong enough to suggest the RBA would hold off for longer.
Nevertheless, the ASX's Rate Indicator showed a 68% probability of a cut decision as of yesterday, compared to a 32% chance of there not being a change. Meanwhile, The Sydney Morning Herald reported on Monday that 20 of 25 economists polled by Bloomberg believed the RBA would cut.
Indeed, Australia's low inflation was a talking point in the RBA's commentary. It said: "Recent data confirms that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time."
The RBA also commented on the "very large decline in business investment." Of course, the hope is that a further decline in interest rates will encourage businesses and consumers to spend more, but there are critics who question whether a decline from 1.75% to 1.5% will be enough to make a difference in their financial decision making.
It's likely that the rising Australian dollar will also have impacted the RBA's decision during today's meeting. The dollar was buying US75.46 cents just prior to the announcement (although it was fetching more than US 76 cents yesterday), but fell to US75.12 cents shortly after.
All in all, the RBA established that a 25 basis point cut would help guide the economy back towards a more sustainable growth trajectory, including a more appropriate rate of inflation. Indeed, the RBA is tasked with keeping inflation growth between 2% and 3%, with the recent rise of just 1% well outside that target range.
While the Australian dollar fell marginally, share market investors also responded positively. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) regained 20 points or 0.4% shortly after 2:30pm AEDT, although it is still trading 13 points lower for the day.
Meanwhile, shares of Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) both experienced a slight rebound, with Telstra Corporation Ltd (ASX: TLS) also lifting around 0.4%.
Of course, further interest rate cuts are not good news for most retirees – many of whom rely on higher interest rates to live from the interest income. However, the RBA's decision will likely be celebrated by dividend investors around the country, with demand for their shares likely to continue to rise as the hunt for yield continues to grow.
