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Here’s why the RBA might hold off cutting interest rates in May

The latest consumer price index (CPI) data, released by the Australian Bureau of Statistics yesterday, has forced the market to reassess its outlook for future interest rate movements.

The minutes from the Reserve Bank of Australia’s latest meeting, which were released on Tuesday, showed that its board members had seen advantages in waiting for the data on inflation to assess whether or not the economy was struggling as much as first thought, and whether further easing in monetary policy was necessary at this stage.

The ABS data showed a rise of 0.2 per cent in the three months to March, giving an annual rate of just 1.3 per cent which is well below the Reserve Bank of Australia’s target inflation levels of 2-3 per cent per annum. At the same time however, the weighted median, which provides a measure of the underlying inflation trend, rose 0.6 per cent for the quarter for an annual rate of 2.4 per cent – which is much more central to the RBA’s target range.

While this was perhaps slightly higher than what investors had been expecting, The Australian said yesterday the market’s pricing of the chance of an interest rate cut in May had fallen from 64 per cent to 52 per cent. The strong surge in iron ore prices overnight is also likely to dampen the market’s hope for further interest rate cuts in the near-future, with the commodity having now risen 16% since bottoming out earlier this month, around the time that the RBA board last met.

What this means for investors

In February, the RBA cut interest rates for the first time in 18 months, taking the official cash rate to just 2.25 per cent. It has since elected to leave them on hold however, surprising investors who were expecting at least one more interest rate cut in that time.

The lack of further stimulus has sparked doubt amongst the nation’s dividend investors who have reacted by selling off their shares in Australia’s high-yield stocks, including the Big Four banks, Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW). Notably, all six stocks are trading lower today with National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) falling the heaviest amongst the banks, down 0.7% and 0.2% respectively.

Is there an opportunity?

Although the chance of an interest rate cut next month may have faded marginally, the economy is still in an uncertain position which could require further stimulus to be provided in the near future. Whether or not another interest rate cut does occur it’s likely that low interest rates are here to stay for some time yet. As such, investors could look to take advantage of the recent selloff.

At the same time however, they would be wise to avoid the Big Four banks and even Telstra – none of which I believe are offering reasonable long-term prospects from their current prices. Luckily, there are other high-yield dividend stocks which could make for greater investments today.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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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