Based on the recent trajectory, Australians expect the Reserve Bank of Australia (RBA) to deliver further interest rate cuts over the course of this year. However, the timing and magnitude remain up for debate.
As reported by Yahoo Finance, one economist believes the RBA has just been handed a bigger mandate to cut interest rates next month.
Beginning in February this year, the RBA began delivering rate cuts following the fastest rate hiking cycle in 40 years.
KPMG chief economist Brendan Rynne thinks a recent piece of data has strengthened homeowners' chance of receiving a 25 basis point rate cut next month.
Image source: Getty Images
Which piece of data is he referring to?
Yesterday, the Australian Bureau of Statistics released the employment data for May.
The unemployment rate remained steady at 4.1%. This remains below the RBA's expectations of the unemployment rate reaching 4.3% this year. However, 2,500 fewer Australians were employed in May relative to April. This came after two consecutive months of strong job growth.
According to Yahoo finance, Rynne believes the private sector won't be strong enough to cope if the public sector slows.
He also suggested we could see a material spike in unemployment figures in the future.
Rynne believes the RBA needs to get ahead of this by delivering further rate cuts.
The RBA will next meet on 7-8 July.
What should investors do?
While lower interest rates are great news for borrowers, it is bad news for investors with a significant amount of cash in the bank.
In a falling interest rate environment, holding money in cash or term deposits becomes less appealing due to the lower return. Under these conditions, investors often look for alternative investments to boost passive income.
In a falling interest rate environment, ASX 200 stocks with reliable dividend streams become more appealing.
Those after reliable passive income might be drawn to Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). The investment company has the distinction of being the only ASX stock that has increased its dividend every year since 2000.
Soul Patts currently offers a dividend yield of 2.25%.
The company has also delivered impressive capital growth over the past 5 years, climbing 110%.
Those after bigger dividend payments might be tempted to consider ASX 200 bank stocks instead.
Of the big four banks, ANZ Group Holdings Ltd (ASX: ANZ) currently has the largest dividend yield at 5.84%.
However, in a 13 June research note, broker Macquarie Group Ltd (ASX: MQG) warned that current dividend payments offered by the big four banks are unlikely to be sustainable. The broker expects ANZ, National Australia Bank (ASX: NAB), and Westpac Banking Corporation (ASX: WBC) to deliver dividend cuts in the next few years.
While Macquarie expects Commonwealth Bank of Australia Ltd (ASX: CBA) to maintain its dividend, the broker has placed a price target of $105 on the stock. With the ASX 200 banking stock currently changing hands for $180, this implies a material downside from here.
Foolish Takeaway
Further rate cuts appear increasingly likely. This may motivate Australians with significant cash in the bank to look for better investment opportunities. When looking for reliable passive income, investors should consider not just the size of the current dividend but the sustainability of those payments. Another important consideration is the stock's valuation. Investing in an overvalued stock can materially impact an investor's overall wealth.
