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Three things ASX investors need to know about the RBA’s interest rate decision

The decision by the Reserve Bank of Australia to leave the cash rate at record lows of 1.5% has put our economy in a sweet spot with low cost of debt and a potential pick-up in economic growth.

The Australian Gross Domestic Product (GDP) figure will be released tomorrow and experts are predicting a better-than-expected figure following the strong inventory and company profits data that was released on Monday.

This is the ideal climate for shares to outperform, particularly for industrial stocks like our national carrier Qantas Airways Limited (ASX: QAN) and engineering group Downer EDI Limited (ASX: DOW).

However, you won’t find much cheer on the market today with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) falling 0.3% in afternoon trade as interest-rate sensitive sectors like utilities and real estate led the decline.

Shares in energy retailer and producer Origin Energy Ltd (ASX: ORG) is among the biggest losers on the ASX 200 at the time of writing with a 3.1% plunge to $9.29 after management committed to cutting energy prices in Queensland and South Australia in spite of higher costs.

But gas pipeline owner APA Group (ASX: APA) and electricity infrastructure company Ausnet Services Ltd (ASX: AST) weren’t far behind with a more than 2% drop; while property developers Mirvac Group (ASX: MGR) and GPT Group (ASX: GPT) suffered similar losses.

Apart from Origin (which is leveraged to the oil price), I believe these rate-sensitive stocks will continue to lag even though the RBA has indicated today that it is in no rush to lift rates anytime soon.

Here’re three other things you need to know about today’s RBA rate decision:

  • Our central bank is expecting economic growth to accelerate in Australia to a little over 3% this year and next, but it acknowledged that its hands are tied when it comes to lifting rates for the foreseeable future due to record household debt.
  • The RBA is also tipping inflation to accelerate but there’s a tacit acknowledgement in its statement that wages probably won’t grow for a while yet. This means a potential erosion in consumer spending if wages don’t keep pace with inflation. The labour market is tightening but the number of women and elderly entering the workforce is holding back wage growth. If there is one thing about the domestic economy that’s worrying the RBA, it’s the uncertain outlook for household consumption.
  • China watchers will find this one point noteworthy. The RBA thinks the biggest international risk to the Australian economy isn’t from the highly leveraged Chinese economy but from political turmoil in Europe and US President Donald Trump’s trade war stance (The RBA took the courtesy not to name him directly but we all know who to blame). The RBA is actually relaxed about the Chinese economy despite some experts predicting a debt-fuelled meltdown in late 2018 or 2019.

Today’s RBA comments have reinforced my view to be overweight on resource stocks (as well as companies that service this industry) and underweight on banks and rate-sensitive stocks.

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Motley Fool contributor Brendon Lau has no position in any of the 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 Scott Phillips.

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