Investors shouldn't expect an interest rate cut when the Reserve Bank of Australia board members meet on Tuesday, but one mightn't be too far around the corner.
When will the RBA cut interest rates?
Economists have all but ruled out a cut to 1.75% on Tuesday, down from the current record low of just 2%. The Australian Financial Review noted that all 12 economists or senior bank members surveyed by Fairfax Media expected no cut in April. While, the ASX's RBA Rate Indicator showed that market participants were giving just a 7% likelihood of a cut.
However, their expectations for tomorrow's meeting don't necessarily match up with the expectations for the remainder of 2016. Many economists believe there will be as many as two interest rate cuts by the end of the year, with the first one potentially coming next month.
AMP Capital's chief economist, Shane Oliver, is reportedly among those analysts who believe a May interest rate cut is on the cards. The AFR quoted him as saying:
"The main reasons are that mining investment continues to unwind, the contribution to growth from housing looks like it will slow over the year ahead, the RBA will likely need to offset further out-of-cycle bank interest rate hikes, inflation is likely to remain low and in order to help push the Australian dollar back down."
The likelihood of a May cut occurring would also increase if the Federal Reserve keeps interest rates on hold in the United States for another month.
On the Australian Dollar
The dollar is currently fetching US76.70 cents, which is well above the RBA's target level which is said to be around US65 cents. A decision from the Fed to keep interest rates on hold for longer would likely boost the value of the Australian dollar so, in those circumstances, the RBA may need to intervene to force the currency lower.
However, that is one issue the RBA's board members may attempt to tackle tomorrow. In their recent statements regarding policy decisions, they've been very quiet on the currency front. Rather than maintain that stance, they may instead try to "jawbone" it lower, which means they will try to talk it down, or else hint at future interest rate cuts in the case where that doesn't work.
What happens next?
Of course, while there are those economists who are forecasting one or two interest rate cuts this year, there are plenty who are suggesting the RBA is finished with cutting rates. After all, it doesn't want to provide the housing market with any more energy, while it also needs to have flexibility to cut rates in the future if economic conditions do worsen.
However, the chances of an interest rate hike appear very slim. Whether or not they remain at or fall below 2%, they will stay low for the foreseeable future, which bodes well for income investors.
Indeed, with interest rates sitting at a record low, investors are still turning to shares offering solid dividend yields – many of which far exceed the returns on offer from cash deposits and government bonds. In my opinion, Retail Food Group Limited (ASX: RFG) and Telstra Corporation Ltd (ASX: TLS) are among the more attractive opportunities, while Wesfarmers Ltd (ASX: WES) shares also offer good value for long-term investors.
