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3 things you need to know about the RBA’s interest rate decision today

The Reserve Bank of Australia (RBA) kept interest rates at record low of 1.5% for the 21st straight time as the central bank conceded that our economy needs the low cash rate in order to meet its growth and inflation targets.

Investment markets were unperturbed with the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index trading at the top of its intra-day range while the Australian dollar was relatively unmoved by the news.

But look a little bit deeper and you’d find three interesting things that every investor should know about the RBA’s decision today.

The first is a brief mention about the risks posed by US President Donald Trump’s trade war and the stress emerging markets are under with a key Chinese stock index falling into bear territory (that is a fall of 20% or more).

It’s impossible for anyone to quantify the risk of a trade war as Canada, Europe and China start retaliatory trade sanctions against the US on Friday – the same day the US is slapping tariffs on these countries.

Another uncertainty that the RBA mentioned in its statement accompanying its rate decision relates to rising funding costs for our banks and businesses.

“In Australia, short-term wholesale interest rates have increased over recent months,” said the RBA.

“This is partly due to developments in the United States, but there are other factors at work as well. It remains to be seen the extent to which these factors persist.”

Reading between the lines, the RBA is starting to worry about this because our central bank can lose control of the effective interest rate in Australia if higher wholesale funding rates force borrowers to cough up more on loans.

This is one of the key reasons I am underweight on the banking sector, which is dominated by Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB).

The third takeaway from the RBA’s statement, which also relates directly to the banks, is the comment on falling house prices.

The RBA sees this more as a positive than a risk. It noted that prices in Sydney and Melbourne have eased and that lending to investors has slowed “noticeably”.

“Lending standards are tighter than they were a few years ago, with APRA’s supervisory measures helping to contain the build-up of risk in household balance sheets,” added the RBA.

“Some further tightening of lending standards by banks is possible, although the average mortgage interest rate on outstanding loans has been declining for some time.”

It’s interesting that the central bankers were backward looking on this front even as it mentioned the threat of the wholesale interest rate market.

Lenders outside the big four have lifted mortgage rates last week and there’s every expectation that all lenders will soon have to lift rates unless whole funding market pressure eases in the next few months.

Perhaps the biggest takeaway from the RBA today is the tacit admission that its sway over our economy is slipping as the key risks to economic growth lie well beyond our borders.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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