Most investors are expecting the Reserve Bank of Australia to cut interest rates to 2 per cent in the coming months but Christopher Woods, who is the managing director and chief strategist of CLSA, believes they could fall as low as zero per cent.
As is being reported by the Fairfax press, Wood, who correctly advised investors in 2005 to sell out of sub-prime securities, believes Australian interest rates will be less than 1 per cent within the next two years, while they could even fall to zero.
Although the RBA is somewhat constrained due to the inflated housing market, low interest rates are seen as a necessity given the drop in gross domestic product (GDP), diminishing consumer and business confidence levels and a high unemployment rate. According to Fairfax, Wood said: "I think less than 1 per cent within the next two years. They are going to end up a lot lower than people still imagine" (my own emphasis added).
Indeed, the latest speculation of an imminent rate cut comes after the Federal Reserve's statement on monetary policy yesterday. While it had been widely expected to start lifting rates as soon as June, it has now indicated that a rate hike will be slower than anticipated as it downgraded its inflation expectations for the US.
The move triggered a rapid rebound for the Australian dollar which climbed above US78 cents, away from the RBA's target rate of US75 cents which it believes is needed to add stimulus to the local economy. As such, there is now pressure for the central bank to intervene by cutting interest rates in the near future.
This heightened speculation resulted in the strongest single-day rally for the Australian share market in five-weeks yesterday, which saw the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rise by more than 1.8%. As expected, the rally was driven by high-yield dividend stocks such as Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC), which all remarkably hit new all-time highs.
With interest rates set to fall even further, it is obvious that investors will continue to target high-yielding stocks such as those mentioned above. I would expect other companies such as Coca-Cola Amatil Ltd (ASX: CCL) and QBE Insurance Group Ltd (ASX: QBE) to also benefit given their solid yields. However, there's one more company which could be an even better buy right now.
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