Is the Reserve Bank of Australia finished cutting interest rates?

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Australia’s cash rate will remain unchanged at 1.75% for another month after the Reserve Bank of Australia decided to keep interest rates on hold through June.

The RBA cut the cash rate for the first time in 12 months in May – a decision which was followed by plenty of speculation that the next cut could come within one month. Indeed, that speculation was sparked by shockingly low inflation figures, while a stronger Australian dollar likely caused the board members to act at the time as well.

However, expectations for another interest rate cut in June have declined in recent days. Indeed, the ASX’s RBA Rate Indicator showed that market participants had priced in a mere 8% chance of a cut today, while 92% said there would be no change.

In saying that, however, the Australian dollar did rebound immediately after the decision was made public. It is fetching US 74.15 cents at the time of writing, compared to US 73.7 cents immediately prior, which suggests some participants had expected a cut.

In regards to inflation, the board said: “Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.”

However, it said that overall economic growth is continuing, although business investment is something it will keep an eye on. It will also watch the appreciating Australian dollar to ensure it is not hindering the economy’s growth prospects, including with exports.

Overall, it said: “Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

It probably wasn’t what high-yield dividend investors wanted to read, which would explain the sudden pullback in the share prices of businesses such as Telstra Corporation Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA) after the announcement was released. These shares are among the country’s most popular dividend-paying shares, so a lower interest rate would likely have led to an increase in demand for them.

Although the RBA didn’t really indicate that it had even pondered cutting interest rates today, it is highly likely that it will stick with lower interest rates for the foreseeable future – perhaps a number of years.

While further interest rate cuts are expected at some point in the coming months, dividend investors can at least be confident in the excellent returns offered by their shares compared to other ‘risk-free’ assets such as government bonds or term deposits.

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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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