Banks to stay strong with RBA expected to hold on cash rate

When the Reserve Bank of Australia (RBA) meets today, it is expected that the board will leave the official cash rate at its record low of 2.5% with the possibility of lowering it further later in the year.

Despite the rise in the unemployment rate as well as a strengthening dollar due to the US Federal Reserve’s decision to delay tapering its stimulus program, it seems likely that the RBA will keep the current rate until key inflation data and September’s employment report suggest further action should be taken.

Meanwhile, the board will not want to risk lowering the cash rate unnecessarily in case of exacerbating the risk of a property price bubble.

Assuming that interest rates are kept on hold today, the RBA will be watching to ensure that the major banks including Westpac (ASX: WBC), ANZ (ASX: ANZ), NAB (ASX: NAB) and Commonwealth Bank (ASX: CBA) maintain their lending standards to ensure all borrowers will be able to repay their debts.

Meanwhile, the share price of each of the banks should remain high as investors continue to prefer the dividend yields over the returns offered in term deposit.

Foolish takeaway

Although a rate cut is not expected to be announced today, some analysts anticipate that one could occur sometime in the fourth quarter – particularly if inflation data or a strengthening dollar suggests further easing may be necessary.

With interest rates low, the share market has rallied and taken many companies to unreasonable prices, however, there are still plenty of attractive opportunities. For instance, two of Australia’s most promising small companies are still flying under the radar. Discover these two exciting ASX investments in our brand-new special FREE report, “2 Small Cap Superstars”. Click here now, it’s free!

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

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