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Are more interest rate cuts on the RBA’s agenda?

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The Reserve Bank of Australia is likely to look past Britain’s shock decision to leave the European Union — dubbed Brexit — when it meets tomorrow, but further interest rate cuts mightn’t be too far away.

Britain threw global markets into a tailspin on 23 June when it unexpectedly voted to leave the European Union, sparking fears that other EU members could soon follow its lead. Equity markets plunged, gold soared and currency markets fluctuated wildly, leaving consumers all around the world with a lingering sense of uncertainty.

According to Business Insider, however, all 25 of the economists recently interviewed by Bloomberg expect that the RBA will leave the cash rate on hold when it meets tomorrow.

However, 24 of the 25 interviewed said they expect the RBA will cut interest rates when they meet again on 2 August, acknowledging the fact that the RBA will be able to base its decision on freshly available data on inflation at that time.

Of course, that doesn’t completely rule out an interest rate cut tomorrow, particularly given the uncertainty cast by the weekend’s federal election whereby a winner is yet to be announced. That could weigh into the RBA’s decision, although it is more likely that the central bank will switch to an interest rate easing bias.

What that means is that instead of actually cutting interest rates, it will send a strong signal to the markets that its next move is most likely to be a cut. That could force the Australian dollar lower and potentially provide the market with an injection of confidence.

Whether or not the RBA does cut interest rates tomorrow, it is becoming increasingly clear that lower interest rates are here to stay for the foreseeable future.

According to The Sydney Morning Herald, some, including Jamieson Coote Bonds, have even suggested there could be as many as four interest rate cuts in the pipeline, which would take the cash rate to just 0.75%, although that seems unlikely to happen in the immediate future.

That means cash in the bank will likely continue to earn a pittance in interest, while certain shares offering solid dividend yields, such as Wesfarmers Ltd (ASX: WES), Scentre Group Ltd (ASX: SCG), Transurban Group (ASX: TCL) and Retail Food Group Limited (ASX: RFG), remain decent options to generate better income.

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