RBA leaves interest rates on hold, but a cut could be coming

No surprises from the Reserve Bank of Australia today: the central bank’s board has elected to leave interest rates on hold at 2.00%.

The decision was widely expected by economists leading into today’s meeting, while market participants were pricing in a mere 7% chance of a cut as of yesterday.

It appears that Glenn Stevens and his fellow Board members are still happy with the progress being made by the Australian economy, and see no need for further easing in monetary policy just yet.

It noted a rebound in commodity prices recently, although it also acknowledged they remain well below their levels from the past, while it is also happy with the slower growth in house prices — particularly in Sydney and Melbourne.

This could provide scope for the RBA to lower interest rates in the future, if it sees that as a necessary course to take.

However, the RBA did take more note of the strong rise in the Australian dollar since earlier this year. From a low of just US68.28 cents in January, the dollar has since surged to US76.21 cents, putting increased pressure on the miners and other exporters.

The RBA said:“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”

While that is not a direct indication that it will cut interest rates in the near future to limit the currency’s rally, some economists believe there will be as many as two cuts before the end of the year – with one coming as soon as May. The dollar is one factor dictating this belief, while weak inflation numbers and retail spending could also prompt a rethink.

Regardless of whether another interest rate cut does eventuate, you can be almost certain that interest rates will remain low for the foreseeable future. That’s great for investors in high-yield dividend shares, including the likes of Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES).

Both appear to be trading at reasonable prices for long-term investors and could help to offset the low returns on offer elsewhere in the economy.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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