The Reserve Bank of Australia has decided to leave interest rates unchanged at 2.25 percent today, defying the expectations of analysts and the investment community.
Amazingly, 18 out of 29 analysts surveyed by Bloomberg had been expecting an interest rate cut, while the Fairfax press reported that a 93 per cent chance of a cut had been priced in by the fixed income market, up sharply from 59% overnight. This goes to show how wrong analysts and their forecasts can often be.
There was an expectation of a cut due to the strength of the Australian dollar, and recent evidence of economic weakness including an unemployment rate at a multi-year high and slowing investment from mining and non-mining companies.
Yet the RBA still resisted the pressure to cut and noted: "At today's meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being."
It also said further easing of policy may be appropriate in the period ahead.
The outcome of the meeting has thrown the sharemarket into a frenzy, sending the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) down by nearly one percent. Unsurprisingly, it was the nation's high-yield dividend stocks that led the way down, after having lifted on the expectation of further interest rate cuts.
Commonwealth Bank of Australia (ASX: CBA) was down 0.6%, while Telstra Corporation Ltd (ASX: TLS) and Insurance Australia Group Ltd (ASX: IAG) dropped 0.8% and 2.9% respectively.
The decision also impacted the foreign exchange market with the Australian dollar surging past US78 cents. The RBA has been targeting US75 cents to enable a rebalance in the Australian economy.
If the dollar shows too much strength over the coming weeks, you can expect the currency to play a key role in the RBA's next monetary policy decision, which will take place on 7 April 2015.
