Will the RBA cut interest rates below 2%?

There have been plenty of calls for another official RBA interest rate cut, but some traders believe that is unlikely to happen until at least September.

The Reserve Bank of Australia hasn’t cut the nation’s cash rate since May last year, and has repeatedly stated its reluctance to cut rates any further. This is partially due to the fear of adding fuel to the fire in the nation’s property market, while it also recognises the importance of having more flexibility in case economic conditions do worsen.

Although the cash rate is sitting at a record low of just 2%, it is still higher than the cash rates maintained by various other central banks around the world. The Bank of Japan, for instance, recently cut its rates into negative territory (joining others such as the European Central Bank in doing so), while interest rates in the United States are also still close to zero.

The RBA has left the door open for further interest rate cuts if needed, particularly given the low level of inflation right now. However, the Bank has also noted a steady rate of employment, expansion in the non-mining parts of the economy during 2015, and a pick-up in the pace of lending to businesses as reasons why a cut isn’t necessary just yet.

A lift in the price of iron ore recently will likely support that strategy as well, at least in the near-term.

However, what could force the RBA’s hand is the surging Australian dollar. It bottomed out at US68.28 cents earlier in the year (near the target of about US65 cents, according to the bank’s deputy governor Philip Lowe), but has since risen above US75 cents. That won’t help our exporters or the miners and will likely be considered by the RBA’s board in future meetings.

Still, according to The Australian Financial Review, traders think the RBA will hold strong until September, when governor Glenn Stevens ends his tenure at the Bank. The AFR notes that economists are more divided on the issue, with almost half (13 out of 27) predicting a cut by the end of September.

That could largely depend on where the commodity prices go from here, and whether or not the Australian dollar begins to cool down again.

Foolish takeaway

There is no guarantee that interest rates will fall any further, but if they do shares of businesses such as Telstra Corporation Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA) could benefit – particularly given their lucrative fully franked dividend yields. Regardless of whether or not they do fall any further, it seems unlikely that interest rates will rise anytime soon, making certain high-yield dividend shares an attractive long-term bet anyway.

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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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