Will Brexit force a July interest rate cut?

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Investors hoping that Friday’s shock Brexit vote would prompt another official interest rate cut may be disappointed when the Reserve Bank of Australia meets this time next week.

At its most recent meeting on 7 June, 2016, the board noted that its attention was “turning to some particular event risks”, which likely included a potential vote from Britons to leave the European Union (however unlikely that may have seemed at the time).

The board ultimately decided to leave interest rates on hold at 1.75% at that meeting after cutting interest rates by 25 basis points in May.

While the market’s expectations of a rate cut surged on Friday, they have since retreated again. According to the ASX’s RBA Rate Indicator, the perceived likelihood of a cut rose to 38%, but was back at just 24% yesterday.

As noted by The Australian Financial Review, economists aren’t altogether hopeful of a cut next week either. Although business and consumer confidence will likely have been impacted by Britain’s decision, the direct impact on the real Australian economy is unlikely to be major – at very least not in the short-term.

As such, economists believe the RBA is more likely to delay further easing until it can assess second-quarter inflation data which will become available to them late next month, prior to their August meeting.

Regardless of whether or not the RBA does use that opportunity to cut interest rates again, it is becoming increasingly obvious that low interest rates are here to stay for the foreseeable future. While that is bad news for individuals keeping their cash safe in the bank, it could come as good news for investors who own shares in companies offering solid dividends.

One company worth considering is Retail Food Group Limited (ASX: RFG), while businesses such as Telstra Corporation Ltd (ASX: TLS) and even Commonwealth Bank of Australia (ASX: CBA) could become more attractive should their shares fall much further as well.

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Motley Fool contributor Ryan Newman owns shares of Retail Food Group Limited. The Motley Fool Australia owns shares of Retail Food Group 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 Bruce Jackson.

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