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Why the Reserve Bank of Australia left interest rates at 1.5%

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The Reserve Bank of Australia has decided to keep interest rates on hold at 1.5% today, following its decision to cut interest rates at its most recent meeting.

The decision will come as no surprise to most investors. Indeed, it was widely expected that the RBA would keep rates unchanged with the market pricing in a mere 5% probability of a cut leading into today’s meeting, according to the ASX.

What’s more, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) barely budged, falling a mere 0.1% after the announcement was made. High-yield dividend shares such as Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) remained mostly flat as well.

The Reserve Bank again commented on the nation’s slow growth rate, together with lacklustre investment from the business sector which could warrant further interest rate cuts in the future.

However, given that the RBA already cut interest rates in May this year, as well as in August, it is exercising patience before pulling the trigger again. After all, the cash rate is already sitting at a record low, and there is only so much stimulus that any individual interest rate cut can provide at these levels.

That said, if the Australian dollar continues to push higher, the RBA could be forced into action. After all, our exporters rely on a weaker dollar to make our products more appealing to foreign buyers, whereas a high Australian dollar supports imports, thus driving cash out of the country.

Thankfully, the dollar actually declined marginally compared to the US greenback shortly after the result went public. But at US76.2 cents, it remains well above the unofficial level that some Board members have suggested would be ideal at around US65 cents.

Given the rate of growth in Australia right now, together with concerns related to the global economy as a whole, it is very difficult to see the central bank raising interest rates anytime soon. It seems likely that the cash rate will either stay at its current level of 1.5% for the foreseeable future, or else fall even lower.

One way or another, returns on cash deposits will likely continue to generate sub-par returns for your wealth, meaning that high-yield dividend shares such as Retail Food Group Limited (ASX: RFG) or Telstra may be a better place to park your money for the time-being.

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Motley Fool contributor Ryan Newman owns shares of Retail Food Group Limited. The Motley Fool Australia owns shares of Retail Food Group Limited. 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 Bruce Jackson.

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