The Reserve Bank of Australia has released the minutes to its latest Board Meeting, providing investors with a clearer indication of the central bank's stance on monetary policy looking forward.
The Board last met a fortnight ago, on 2 June, when they decided to leave the nation's official cash rate unchanged at 2 per cent, after cutting interest rates in February and May. Today's minutes revealed that there had been some consideration of another interest rate cut, but that it instead decided to leave them on hold in order to determine the impact of previous rate cuts on the economy.
It said: "Having eased policy at the previous meeting, members judged that it was appropriate to leave the cash rate unchanged and to assess information on economic and financial conditions as it became available."
The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) gave up some of its gains following the announcement, although it was still trading 0.3% higher for the day, driven by companies such as Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ).
The high-yielding Insurance Australia Group Ltd (ASX: IAG) also gained 5.6%, although it also benefited from news of an investment from Warren Buffett's Berkshire Hathaway.
One of the biggest limitations on the Bank's ability to reduce interest rates any further is the state of the property market, particularly in Sydney and Melbourne. Indeed, the Reserve Bank's governor, Glenn Stevens, has described the market as "crazy" with lower interest rates pushing house prices to unprecedented heights.
On the other hand, the Bank did acknowledge a number of other key issues, including bleak business expenditure forecasts which some have described as being at "recessionary" levels, together with falling commodity prices. Further, employment growth is expected to be modest over the coming months.
Another major contributing factor is the strength of the Australian dollar. As it stands, the Australian dollar is buying US77.63 cents, which is down from its recent high of US81 cents but still above the Bank's long-held target rate of US75 cents, or lower. The Board noted that a lower cash rate would likely weaken the local currency, but that it would need to be lower for a "sustained period" to have a significant impact on certain industries competing internationally.
The Bank reiterated its view that "a further depreciation (of the Australian dollar) therefore seemed both likely and necessary, particularly given the significant declines in commodity prices over the past year."
Although it decided to leave the cash rate unchanged earlier this month, there certainly seems to be scope to reduce it even further in the future, and potentially before the end of the year. While that isn't so great for retirees or individuals with their cash stuck in term deposits or government bonds, it's great news for dividend investors.
