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RBA on hold but leaves door open for more interest rate cuts

The Reserve Bank of Australia met for the first time in 2016 today where the board members elected to keep interest rates on hold at 2%. The cash rate has remained at that level since May 2015, and showed very little likelihood of changing today.

Indeed, the RBA Rate Indicator on the ASX website was showing a 94% expectation that interest rates would remain unchanged at today’s meeting, leaving a very narrow chance of a 25 basis point cut to 1.75%.

In saying that however, the RBA did leave the window open for further interest rate cuts in the future, saying “continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand.” More on that in a moment.

But first, the Australian economy has struggled for growth recently, largely due to the slowdown in China’s expansion together with crashing commodity prices. The Reserve Bank noted in particular the extreme volatility in oil prices recently, together with the turbulence suffered by global financial markets so far this year as investors grapple with the outlook for the world economy.

On a more pleasing note however, the board did refer to the strengthening of the non-mining sectors of the Australian economy, while surveys of business conditions moved to above average levels. This helped spur a pick-up in the employment rate and the rate of lending to businesses, which could help to boost economic growth in the future.

More Interest Rate Cuts Possible

Although interest rates are already sitting at a record low of 2%, there is a very real possibility that further interest rate cuts could be around the corner. For instance, Citigroup recently forecast a 100% chance of an official interest rate cut in June 2016, while others have suggested the cash rate could be at 1.5% by the end of the year.

While that is bad news for savers and many retirees who rely on interest payments from their bank balances, it could be great for investors in high-yield dividend shares – especially those that come with franking credits attached.

As an added bonus for those investors, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is sitting nearly 17% below its April 2015 peak, with many of its best dividend shares also trading at a steep discount to their prices around that time.

Telstra Corporation Ltd (ASX: TLS) is one such company, which is trading on a 5.5% fully franked dividend yield. Meanwhile, Retail Food Group Limited (ASX: RFG) and Wesfarmers Ltd (ASX: WES) are also attractive at their current prices and offer investors fully franked yields of 5.6% and 4.8% respectively.

Grossed up, those three yields equate to 7.9%, 8% and 6.9%, respectively. With the possibility of capital gains as well, these companies could be amongst your best opportunities to beat this low interest rate environment.

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Motley Fool contributor Ryan Newman owns shares of Retail Food Group Limited. 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 owns shares of Retail Food Group Limited. 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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