The Reserve Bank of Australia has elected to leave interest rates on hold for the second month in a row, once again taking the markets by surprise.
With unemployment remaining near a 12-year high (and expected to increase further), low business and consumer confidence as well as plummeting commodity prices, investors had expected the RBA to reduce interest rates by 25 basis points to a new low of just 2 per cent. Instead, the RBA decided to leave them unchanged at 2.25 per cent, although it did reiterate that "further easing of monetary policy may be appropriate over the period ahead".
The RBA said that the available economic information suggests that Australian growth is continuing at a below-trend pace with domestic demand growth remaining weak as capital expenditure continues to fall. This has also pushed the unemployment rate to 6.3 per cent with some economists suggesting it will climb to near 7 per cent by the end of the year.
Pleasingly, growth in lending to the housing market appears to be slowing (giving the RBA room to move in the future should it consider another rate cut necessary), while it reported stronger lending to businesses recently. This is an encouraging sign as greater business spending could lead to the creation of jobs and greater economic activity.
However, the decision also had an undesirable impact on the Australian dollar which surged 1.2% to US 76.93 cents. Earlier in the session it had been trading closer to the RBA's target rate of US 75 cents, which is needed to help rebalance the economy. Companies exposed to international markets such as CSL Limited (ASX: CSL) and QBE Insurance Group Ltd (ASX: QBE) lost their earlier gains as a result given that a stronger Australian dollar could actually have a negative impact on their reported profits.
The market's enthusiasm for the nation's high-yield dividend stocks also cooled off with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) retreating more than 30 points following the decision. While each of the big four banks had risen strongly earlier in the session, they have since retreated considerably.
Commonwealth Bank of Australia (ASX: CBA), for instance is down 0.4%, while Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) are now trading in line with Thursday's closing price, after having traded more than 1% higher earlier in the session.
Although it elected to leave interest rates unchanged today, most economists still expect the RBA to pull the trigger on further easing when it meets next month. Many also anticipate interest rates will fall to just 1.75 per cent by the end of the year. As such, investors could view this as an opportunity to stock up on some of Australia's most appealing dividend stocks, which could generate significant returns in the coming years.
