The Reserve Bank of Australia will meet for the fourth time in 2015 on Tuesday next week and, for the fourth time this year, investors have no idea what its stance on interest rates will be.
This time last month the market was pricing in a near 100 per cent certainty of an interest rate cut by May at the latest, in a move that would take interest rates to a record low 2 per cent. However, investors aren't so sure anymore with the Fairfax press reporting that traders are pricing in a 58 per cent chance of a 25 basis point cut.
A large portion of the market would argue that another interest rate cut is vital. Business and consumer confidence remain low; unemployment is still hovering above 6 per cent (with expectations it will climb toward 7 per cent this year); the iron ore price remains depressed and the Australian dollar is once again on the climb.
At the same time, others within the market are sceptical of another rate cut and believe the RBA will hold off from wielding its knife for the third month in a row. After all, the iron ore price has rallied hard since the RBA's board last met; unemployment did improve in March (according to statistics from the Australian Bureau of Statistics at least), and inflation figures were marginally higher than what most economists were reportedly expecting.
To top things off, there are also enormous concerns lingering over Australia's red-hot property market. House prices are out of control – especially in Sydney and Melbourne – and there are fears that if the RBA does cut interest rates further, prices will only increase further.
What will the Reserve Bank do?
Indeed, the RBA's board members will have to make a tough decision when they meet on Tuesday and the impact on the share market, and the economy as a whole, could be huge.
The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has plummeted over the last week, with investors seemingly cooling on the prospect of further easing in May. Unsurprisingly, the downward charge has been led by high-yield dividend stocks such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Telstra Corporation Ltd (ASX: TLS), with their dividend yields becoming less appealing should interest rates remain unchanged.
While investors are expecting the worst it appears that more economists are now expecting further stimulus from the central bank. Perhaps the most logical reason is the Australian dollar's recent resurgence; it temporarily rebounded above the US80 cent mark following the release of weak US data.
The data showed that the US Federal Reserve could be further away from increasing its interest rates than first thought which saw the US dollar weaken, and the Australian dollar surge. If the RBA does not cut interest rates, the dollar could continue to soar, extending further away from the RBA's target rate of just US75 cents.
Further easing of interest rates would be great for Australia's dividend stocks, and with the ASX 200 down significantly over the last week, now could be the time to buy them.
