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Here’s what ASX investors need to know about the RBA’s rate decision today

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If the stock and currency markets were hoping to get some direction from the Reserve Bank of Australia (RBA) this afternoon, they would be left disappointed.

The  S&P/ASX 200 Index (Index:^AXJO) didn’t react to the RBA’s interest rate decision while the Australia dollar barely blinked as it stayed around 69.6 US cents.

Rates effectively at zero

The central bank held the official cash rate steady at a record low of 0.25% and left its targeted yield on the three-year Australian government bond at the same level.

Given that interest rates can’t go lower, especially not when the RBA already ruled out negative rates here, what else could governor Philip Lowe do?

But this doesn’t mean there weren’t a few interesting takeaways for ASX investors from Dr Lowe’s monetary statement.

RBA just as confused as the rest

What stood out the most this time was that the RBA looked as clueless about the economic outlook as the rest of us.

The statement highlighted the “severe downturn” in the global economy due to the COVID-19 pandemic and the sharp rise in unemployment.

It then highlighted recent positives like how leading indicators have turned up, signalling that “the worst of the global economic contraction has now passed”.

But it wasn’t ready to say anything more substantive about the outlook for the Australian economy except that the road ahead will be “bumpy” and will depend on the containment of the coronavirus.

Tell us something we don’t know already! No wonder currency and equity investors were so unmoved.

What did take me by surprise is that the RBA didn’t push the government to keep stimulus measures in place like it did in its last statement.

Given that Federal Treasurer Josh Frydenberg is scheduled to give an update on this issue in two weeks, I thought this would be an opportune time for the RBA to say something more.

Flushed with cash

The second takeaway is more encouraging. Our bond market is functioning well despite the COVID-19 hit to global markets.

It’s working so well that the RBA didn’t have to pull its quantitative easing (QE) trigger again by buying Australian government bonds. The board also believes it’s providing more than enough cash to the broader financial system.

This is good news as it shows that there is enough liquidity to keep the gears turning in the Australian economy.

Implications for ASX bank stocks

Perhaps the bigger takeaway for investors is that ASX banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) have sufficient access to capital to keep lending.

The abundance of liquidity won’t help overcome bad debt worries that weighing on ASX banks, nor will it make it easier for Aussies without stable income from borrowing, but it’s at least one less thing bank shareholders will need to fret about.

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Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia and Westpac Banking. Connect with me on Twitter @brenlau.

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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