The Reserve Bank of Australia is expected to slash interest rates further when it meets this afternoon, with rates set to fall to a new record low of just 2 per cent.
Although the Board elected to leave them unchanged at 2.25 per cent when it last met on 3 March, it stated that "further easing may be appropriate" to ensure sustainable growth. Indeed, business and consumer confidence are both declining, the unemployment rate is tipped to approach 7 per cent by the end of the year (up from 6.3 per cent currently), while the iron ore price is also plumbing new lows.
Iron ore accounted for nearly one-third of Australia's exports last year. While the commodity was fetching just over US$62 a tonne when the Board last met, it has since plummeted approximately 24 per cent to a decade low at around US$47 a tonne, according to the Metal Bulletin Ltd.
While that is having an enormous effect on the commodity's producers and investors, it's also left a gaping hole in the federal and state governments' budgets. The Australian quoted AMP chief economist Shane Oliver as saying that this has added "urgency" to a case for another rate cut.
An interest rate cut would likely also force the Australian dollar lower. As it stands the dollar is buying US 76.45 cents, which is still above the RBA's target of US 75 cents. A weaker dollar would enable Australian exports priced in US dollars (including iron ore) to become more competitive which would also lead to greater profitability for the miners.
On that note, a weaker dollar is also likely to benefit companies such as Westfield Corp Ltd (ASX: WFD), ResMed Inc. (CHESS) (ASX: RMD), CSL Limited (ASX: CSL) and Macquarie Group Ltd (ASX: MQG). All of these companies generate a significant portion of their earnings overseas and the weaker exchange rate acts to increase their overall earnings reported in Australian dollars.
However, the bigger focus point will be on Australia's high-yield dividend stocks after the RBA makes its decision. Companies such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Telstra Corporation Ltd (ASX: TLS) could move up or down in price significantly depending on which way the RBA chooses to go.
In a low interest rate environment, investors traditionally turn to the market's 'safest' and highest-yielding stocks to overcome poor returns from other investment classes, such as term deposits or government bonds. Should the RBA cut interest rates this afternoon, you can expect a strong reaction from these stocks and any other stock offering a solid yield.
