There's a 1-in-3 chance of an RBA interest rate cut in May

Market participants are pricing in a 33% chance of an official interest rate cut next month.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Reserve Bank of Australia left interest rates on hold when it met on Tuesday, but that mightn't last much longer.

According to the ASX's RBA Rate Indicator, market participants are pricing in a 33% chance of an official interest rate cut when the board meets in May. By contrast, the market had given a likelihood of between 4% and 7% of an April interest rate cut leading into yesterday's meeting, highlighting the evolving expectations.

Indeed, interest rates are currently sitting at just 2%, and have been since May 2015. Although that is one of the lowest cash rates in Australia's history, it is still considerably higher than the cash rates maintained by various other countries around the world, including Japan whose cash rate has plunged into negative territory.

A growing number of economists believe the cash rate will slip to 1.75% in May. Meanwhile, some are suggesting there will be another cut sometime before the end of the year, which could see that rate fall to just 1.5%.

One of the primary reasons behind these expectations is the recent strength behind the Australian dollar, which has surged 10.6% since mid-January. It's currently fetching US75.5 cents, well above the RBA's unofficial comfort level which is believed to be around US65 cents.

Given that the United States is now expected to increase interest rates at a slower pace than first thought, some of the glamour has been taken out of the US greenback. The weaker US greenback is thus having a positive effect on the Australian dollar given our comparatively higher interest rates. So, to solve that problem and to drive the growth of our own economy, it is believed the RBA will need to reduce interest rates – especially if the dollar does continue to rise.

Of course, lower interest rates does raise the issue of how individuals can boost their incomes. After all, many are already relying on pitiful returns from their savings accounts, and that would likely become even more dismal if interest rates do fall again.

Thankfully, the share prices of some of Australia's best dividend-paying shares have also fallen considerably over the last 12 months, not only lowering the cost of shares but also improving the dividend yields on offer. Telstra Corporation Ltd (ASX: TLS), for instance, has fallen almost 20% from its peak and now offers a 5.9% fully franked dividend yield, while Wesfarmers Ltd (ASX: WES) also offers a 5.1% fully franked dividend yield.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »