What you need to know about the RBA's interest rate decision today

Those hoping that the Reserve Bank of Australia (RBA) would hint about a possible interest rate cut today would be disappointed although our central bankers appear to be more dovish than at the previous rate meetings.

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Those hoping that the Reserve Bank of Australia (RBA) would hint about a possible interest rate cut today would be disappointed although our central bankers appear to be more dovish than at the previous rate meetings.

But the lack of any explicit indications that the RBA stands ready to cut rates to support fragile economic growth probably gave the Australian dollar a boost this afternoon with the Aussie gaining around 0.5% to US72.57 cents.

The RBA decision also didn't seem to have a big impact on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) with the index holding on to most of its robust gains of around 2%, although the market did come off its high after the interest rate announcement at 2.30pm.

The decision to hold rates at a record low of 1.5% would have come as no surprise to anyone but there are a few notable things in the RBA's statement that investors should be aware of.

  • Growth downgrade: The RBA is lowered its GDP forecast with our central bankers tipping economic growth of around 3% in 2019 and "a little less in 2020 due to slower growth in exports of resources." The RBA had pencilled in growth of 3.5% at its last meeting in December.
  • Rising risks: The reserve bank also noted that growth is slowing around the world and that while outlook for the global economy is "reasonable, the downside risks have increased due to trade tensions, slowing growth in China and falling house prices in some of our cities.
    There was no specific mention of the Banking Royal Commission or regulatory risks to credit growth, but I would be surprised if that's something our central bankers didn't talk about behind closed doors.
  • Inflation conundrum: Inflation remains stubbornly low and the RBA hasn't changed its tune about expecting inflation to rise over the medium-term, although they did admit that this is likely to take "a little longer than earlier expected".
    What's giving the RBA hope that inflation will return to its target range is the jobs market. The employment market remains tight and there are signs of skills shortages in some sectors. The RBA believes the unemployment rate will drop to 4.75% over the next few years from its current level of 5%.
  • Don't rule out a rate cut: While some may have expected a more dovish statement from the RBA, there's nothing in their commentary to suggest a rate cut is off the table. If anything, the RBA specifically highlighted how the market is not expecting the US Federal Reserve to lift interest rates anymore. In my opinion, it's unusual for the RBA to specifically talk about US rate expectations. This, combined with the more dovish tone in its policy statement, makes me wonder if the RBA is softening the ground before it signals its willingness to cut rates here.  

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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