The Reserve Bank of Australia's decision on interest rates is in, and it's great news for dividend investors!
At 2:30pm (Sydney time), the RBA announced that it had decided to slash the official cash rate by another 25 basis points to 2 per cent after having sat on its hands for the last two meetings. It's the second time the board has decided to cut rates this year, with the last one having been announced on 3 February.
Although the housing market remains a key issue – particularly in Sydney – the RBA said that the inflation outlook provided the opportunity for further easing in monetary policy. While it said an interest rate cut would "reinforce recent encouraging trends in household demand", it was also necessary to force the Australian dollar lower, especially given the significant declines in commodity prices over the last year.
In regards to the inflated property market, the RBA said it was working with other regulators to assess and contain risks that may arise from rising prices.
ASX falls and AUD climbs
So far, it seems that the decision hasn't necessarily had the desired effect. While the Australian dollar would ordinarily be expected to weaken as a result, the dollar has actually surged nearly 0.9% to be trading at US79.05 cents – away from the RBA's desired level of US75 cents.
At the same time, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen into negative territory after trading more than 1% higher earlier in the session. All of the Big Four banks have fallen from their intraday highs too, with Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA) falling between 0.1% and 1.1% into the red.
Other high-yield dividend stocks have reacted in a similar fashion. Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS) were both trading 1% higher earlier in the session, but are now just 0.2% and 0.5% higher.
Here's why the market reacted so strangely
There are two logical explanations behind the market's somewhat unexpected response.
First and foremost, the RBA said in its statement that it expects the US Federal Reserve to start increasing its policy rate later this year which may be having an impact on investors' confidence.
To me however, it seems that the more likely reason behind the response may have something to do with what was not included in the statement. In April, the board said that: "Further easing of policy may be appropriate over the period ahead", but that line was dropped in today's announcement, confirming many economists' expectations that the easing cycle may have finally drawn to a close.
Whether or not the RBA cuts rates any further remains to be seen, although it appears much less likely unless the local economy takes a significant turn for the worse.
