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What does the interest rate decision mean for investors?

The Reserve Bank of Australia’s (RBA) decision to hold the cash rate at a record low of 2.75% is, on balance, a reasonable outcome for companies and investors given the already historically low rates. That being said, many companies would have benefitted from a further cut.

The big change that has occurred since last month’s cut has been the fall in the Australian dollar (AUD). The RBA statement singled out the decline in the exchange rate, but noted it was still high, which suggests that if the AUD does not continue to fall, it could help the case for the RBA to further cut in an attempt to improve Australia’s terms of trade. In the wake of the RBA’s decision, the AUD is trading at around 97 cents to the US dollar. With inflation in check, it was really a wait-and-see approach from the RBA.

US dollar-exposed stocks including Computershare (ASX: CPU) and resource stocks such as BHP Billiton (ASX: BHP) have performed well since last month’s cut to interest rates. The lack of a follow-up cut to interest rates may lead to the AUD settling around current levels which may slow the outperformance of export-oriented stocks.

Meanwhile, the Housing Industry Association (HIA) immediately added its voice to the crowd, describing the decision to hold rates ‘a disappointment’. The HIA pointed out that, ‘House building is substantially lower than a decade ago, despite the fact that the population is at a record high. A continuation of this trend will mean an acute shortage of housing will emerge by the end of this decade’.

The comments from the HIA highlight to investors the potential of building stocks to rebound in the future when home building inevitably picks up. It also highlights that the all-important economic stimulator of home building is not currently boosting the economy even though rates are low. There are certainly a number of conflicting factors at play and whether the HIA’s call for another interest rate cut would really get the home building sector firing is questionable. That being said, investors may consider its time to start selectively adding cyclical building stocks such as Boral (ASXL: BLD) and Brickworks (ASX: BKW) to their portfolios.

Consumer discretionary comapnies would also have been hoping for a rate cut. Companies that are reliant on purchases which are not critical, such as Myer (ASX: MYR) and David Jones (ASX: DJS), miss out on any benefit that might have been gained from consumers having more disposable income thanks to lower rates.

Foolish takeaway

Interest rates do have an important influence on stock valuations and the economy. They also send a clear picture about how the RBA views the outlook for the economy. While economic issues deserve to be considered by investors, Foolishly, we’d rather buy rock-solid investments that can perform well in any economic environment.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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