The Reserve Bank of Australia is expected to slash interest rates further when it meets tomorrow in a move that would see the nation's cash rate slip to a record low of just 2 per cent. As reported by the Fairfax press, 18 of the 29 economists surveyed by Bloomberg expect the central bank to swing its axe once again on Tuesday while the remainder expect a reduction by the board's May policy meeting.
The interest rate futures market also sees a 56 per cent chance of an interest rate cut, which is up from a 40 per cent chance prior to the release of key economic data last week. The data, which was released by the Australian Bureau of Statistics, revealed slower economic investment by Australia's mining and non-mining businesses. While political uncertainty is no doubt playing a role in this, an easing in monetary policy may be what it takes to stimulate the local economy.
Meanwhile, numerous other central banks around the world have also been easing their own interest rate policies which has put an upward pressure on the Australian dollar (AUD) recently. While the AUD plummeted to its lowest level in nearly six years early in February, it has since resurfaced to uncomfortable levels around US78 cents – above the RBA's target level of US75 cents. The RBA could be forced to lower rates to ensure it doesn't rise any higher.
So What: The market is pricing in just a 56% chance of a rate cut tomorrow so no matter what action the RBA decides to take, a volatile response is likely as investors frantically readjust their portfolios accordingly.
If a rate cut does occur however, you can expect the market's high-yield dividend stocks to soar. That would likely include the usual suspects, such as Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS) and Westpac Banking Corp (ASX: WBC). Rather than piling your money into already inflated stocks, there are a number of other dividend stocks which present as far greater buys today.
