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Reserve Bank tipped to cut rates to record lows next week

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Next week the Reserve Bank will meet to discuss the cash rate once again.

According to an economic note out of Westpac Banking Corp (ASX: WBC), its team are confident a rate cut is coming.

However, rather than going to zero, Westpac believes the central bank will take rates down from 0.25% to 0.1%.

Westpac’s Chief Economist, Bill Evans, commented: “As we indicated in September, we expect the RBA to lower rates, cutting both the cash rate target and the 3 year government bond target from 0.25% to 0.10%. In addition, the Bank will announce an expanded bond buying program, QE, with the aim of lowering rates across the curve, including 5 years to 10 years.”

After which, the bank is forecasting that rates will remain on hold at the record low of 0.1% until at least December 2022. That’s over two years with rates at these ultra-low levels.

What about the future?

Unfortunately for savers and income investors, a rebound to “normal” levels of 2% to 3% is unlikely to be swift. I suspect it could be 2025 or 2026 when rates return to these levels again. And that’s on the assumption that there are no economic crises between now and then.

In light of this, I think it’s best to accept that savings accounts and term deposits will not be providing a liveable source of income for a long time to come.

But don’t worry, because the Australian share market is here to save the day with its large number of dividend shares which offer vastly superior yields.

Two dividend shares that I think would be great options for income investors right now are Coles Group Ltd (ASX: COL) and Telstra Corporation Ltd (ASX: TLS).

I like both companies due to their strong market positions, defensive qualities, and generous dividend yields. The latter is especially the case for Telstra, which is aiming to pay 16 cents per share to shareholders this financial year. Based on the latest Telstra share price, this equates to a fully franked ~6% dividend yield.

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Returns As of 6th October 2020

Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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 Scott Phillips.

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