Brexit not enough to force RBA interest rate cut

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The Reserve Bank of Australia has elected to keep interest rates on hold today, potentially disappointing some investors who were holding out for lower borrowing costs.

The outcome of today’s meeting should hardly come as a surprise. Despite the uncertainty caused by Britain’s decision to leave the European Union – dubbed Brexit – late last month, all 25 economists surveyed by Bloomberg said they expected interest rates to remain unchanged in July.

Stating that “most markets have continued to function effectively” in the wake of Britain’s referendum the RBA said it will continue to watch for effects of the outcome rather than cutting rates impulsively. However, it did acknowledge that those effects “may be hard to discern” outside of the UK economy itself.

What’s more, Australia was hit with another bout of uncertainty over the weekend due to the inconclusive results of the federal election, but the RBA ultimately looked beyond that. As such, interest rates will remain at 1.75% for at least another month.

Indeed, most economists believe that a rate cut will happen when the board meets again in August, when the RBA has access to the latest inflationary data, which will be available late this month.

The RBA said: “Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”

However, that expectation may have been dampened somewhat by the lack of easing bias that the RBA was expected to introduce into the statement that accompanied its decision.

This was perhaps reflected by the small bounce in the Australian dollar shortly after 2:30pm AEST and a slight dip in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). Shares of high-yield dividend shares such as Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) are also trading lower.

Although the RBA didn’t change its stance today, it did note the potential complications of an appreciating dollar, together with a “very large decline” in business investment. If either of these trends continue, or if the latest inflation numbers disappoint, the RBA could be forced to cut rates soon.

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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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