The Reserve Bank of Australia has elected to cut interest rates for the first time in 12 months today, taking Australia's cash rate to a new record low of just 1.75%.
Leading into today's meeting, economists were divided as to what the board would decide. According to The Sydney Morning Herald, more than half of those economists surveyed by Bloomberg said the RBA would hold steady for another month, but others claimed they would no longer be able to ignore low inflationary pressures — and they were right.
In its announcement, the RBA said: "Inflation has been quite low for some time and recent data was unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast."
The rising Australian dollar also appears to have swayed the board's decision. After the currency hit a fresh low of just US68.27 cents in January, it peaked above US78 cents recently, placing unwanted pressure on Australia's exporters and offsetting some of the benefits of the appreciating iron ore price. The Australian dollar fell immediately following the announcement and is currently fetching a little under US75.9 cents.
With the RBA board meeting now out of the way, the next question is whether or not the banks will pass all (or any) of the savings onto customers. Given that the banks are already making thin margins on their loans and facing the prospect of rising bad debts, they may be hesitant to and instead choose to remain out of sync with the RBA.
While lower interest rates will no doubt get savers and many retirees offside by reducing their interest income, dividend investors are laughing.
The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rallied following the RBA's decision, highlighting that it caught many investors off-guard. Leading the gains were companies such as Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS), up 2.7% and 1.2% respectively. Australia and New Zealand Banking Group (ASX: ANZ) shares were also trading 5.1% higher even though the bank announced it was cutting its interim dividend this morning.
