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Will the RBA cut interest rates on Tuesday?

RBA Reserve Bank

The Reserve Bank of Australia will meet again on Tuesday afternoon to discuss its official stance on interest rates, with many economists suggesting that further easing is necessary.

The nation’s cash rate currently stands at a record low of just 2 per cent after the RBA slashed the rate by 25 basis points, or 0.25 per cent, in both February and May this year. Since then, it has been hesitant to cut rates due to Sydney and Melbourne’s booming property markets, but that issue may need to take a back seat in favour of supporting jobs growth and helping to restore the local economy.

Indeed, Australia has for so long been one of the key beneficiaries of China’s monstrous economic growth thanks mostly to our resource-rich land. But with the world’s second-biggest economy now experiencing a sharp slowdown, there are fears of a hard landing locally with many economists predicting what could be our first recession in 24 years.

This fear has been exacerbated most recently by a report issued by the International Monetary Fund, which forecast diminishing growth for commodity exporters, including Australia. Canada, another resources exporter, has already slipped into recession.

What will the RBA do?

As it stands, the market and most analysts believe interest rates will remain unchanged when the RBA announces its decision at 2:30pm tomorrow afternoon (Sydney time).

However, there is a growing chorus of economists who believe there will be further interest rate cuts in the near future. As highlighted by the Fairfax press, analysts from the Australia and New Zealand Banking Group (ASX: ANZ) and Capital Economics are among those suggesting the cash rate will fall to 1.5 per cent, with others suggesting another rate cut will happen before the end of the year.

Many see this as a necessary course of action to help drive the Australian dollar even lower to bolster our exports, while it would also be good for tourism and employment growth. Although it wouldn’t be so good for individuals with their wealth stashed away in cash or bonds, it would be good for dividend-hungry investors – many of whom have already profited handsomely over the last five years or so as interest rates have fallen to their current level.

Personally, I think interest rates do have further to fall. Whether it’s tomorrow, next month or next year, investing in high-yield dividend stocks such as Coca-Cola Amatil Ltd (ASX: CCL) and Westfield Corp Ltd (ASX: WFD) seems like a smart way to build your wealth.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. 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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