Yesterday, Westpac (ASX: WBC) joined several other financial institutions in predicting a July rate cut.
This comes after a better-than-expected inflation report was delivered on Wednesday.
The Australian Bureau of Statistics (ABS) revealed that the monthly consumer price index (CPI) came in at an annualised 2.1% in May. This sits well below the RBA's target range of between 2% and 3%.
Commenting on its updated forecast, Westpac's Chief Economist Luci Ellis wrote:
The May monthly CPI indicator came in below even the low number that we expected. That helps bring forward inflation's return to the 2.5% target midpoint and keep it there, which is what the RBA is trying to achieve.
The detail around housing and market services was also a promising sign that core inflation is seeing a sustained moderation. But the June quarterly inflation numbers are still likely to print on the high side, so some caution on the inflation outlook is likely and warranted.
Yesterday, as reported by The Motley Fool's Sebastian Bowen, Commonwealth Bank of Australia (ASX: CBA) made a similar call.
AMP Ltd (ASX: AMP) had already expected the Reserve Bank of Australia (RBA) to deliver a July rate cut.
Previously, Westpac had expected the RBA to hold rates steady in July before delivering a 25 basis point cut in August.
Westpac continues to expect a terminal rate of 2.85%. Given that the cash rate currently sits at 3.85%, this suggests three further 25 basis point rate cuts after the (expected) July rate cut.
What should investors do?
Accelerated rate cuts are good news for borrowers. However, they aren't so good for investors relying on bank interest for passive income.
This is likely to make dividend-paying stocks more appealing. Hence, it could be a good time for investors to start looking for ASX opportunities. This could mean high-yield stocks such as BHP Group Ltd (ASX: BHP), which currently offers a dividend yield of 5.3%.
Alternatively, Australian investors may prefer ASX exchange-traded funds (ETFs) for broad diversification. The Vanguard Australian Shares High Yield ETF (ASX: VHY) currently has 67 holdings and offers a dividend yield of 4.83%.
However, when switching from term deposits (bank interest) to ASX stocks (that pay dividends), investors should keep both the return and risk involved in mind.
In the case of term deposits compared to the VHY ETF, the yield (4.83%) is far above Westpac's expected terminal cash rate of 2.85% (which is likely to translate into bank interest of around 2-3%).
On the flip side, ASX ETFs can go down in value. Between 28 March and 7 April, the VHY ETF declined 12%. Although it has since recovered, this was not guaranteed. The potential to suffer a capital loss isn't something cash investors need to worry about, which may help them sleep at night.
