RBA leaves rates on hold, for now

As most analysts had expected, the Reserve Bank of Australia left the official cash rate on hold at its record low of 2.5%, despite some speculation that a cut could have been agreed upon.

Slightly dovish comments made by the RBA’s boss, Glenn Stevens, last week suggested that a cut could have been in store. Whilst that did not eventuate yesterday, four out of 12 economists surveyed by AAP have forecast a reduction in the first half of next year.

The board has remained very hesitant to cut rates lower than their current levels, despite the positive effects it would likely have on the Australian dollar. This is largely because lower borrowing costs could lead to even more heat in an already strengthening property market.

According to Barclays senior economist Kieran Davies, it seems more likely that a lower Australian dollar would provide a more immediate boost to the economy than a further rate cut. Stevens said, “The Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy.”

Exporters and tourism companies’ earnings have been restricted by the high Australian dollar. For instance, companies such as QBE Insurance (ASX: QBE) or Cochlear (ASX: COH) rely on the US market for much of their revenues and would surely benefit from a weaker dollar, as would resources companies including BHP Billiton (ASX: BHP) or Rio Tinto (ASX: RIO).

Furthermore, the consumer price index (CPI), which is released by the Australian Bureau of Statistics and is the key measure of inflation, rose 1.2% for September — above the 0.8% forecast by economists. This will likely have evaporated all hopes of another rate cut in 2013, with just one more RBA board meeting remaining for the year.

Foolish takeaway

Over the last 18 months, the Australian share market has soared, in part due to the nation’s low interest rates. As such, it has become more difficult to find bargain stocks (but not impossible, if you know where to look).

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