The chances of another interest rate cut when the Reserve Bank of Australia meets next week just exploded following the release of much weaker-than-expected inflation numbers for the third quarter.
The data, released by the Australian Bureau of Statistics today, showed that consumer prices rose just 0.5% during the third quarter and 1.5% in the year to September. That compares to the 0.7% forecast by economists for the quarter and 1.7% growth expected for the year.
Core inflation figures, which are closely monitored by the RBA, were even worse. They rose just 0.3% during the quarter and 2.1% for the year – both of which were considerably lower than the market's expectations.
As highlighted by The Australian Financial Review, today's results top off the weakest run of inflation in 16 years. It comes at a time where unemployment is sitting above 6%, commodity prices are crumbling (and tipped to fall further), China's growth is slowing, and consumer and business confidence levels both remain weak.
To make matters worse, each of the big four banks have increased their mortgage rates as a result of tougher regulations requiring them to hold more capital, which could force the Reserve Bank to offset those increases with a cut of its own.
According to the Fairfax press this morning, the market was pricing in a 28% chance of an official interest rate cut when the RBA meets next Tuesday. Fairfax is now reporting a 52% chance of an interest rate cut on Melbourne Cup Day, and an 80% chance of a cut in December, with the Australian dollar also plummeting upon the heightened expectations.
That's great news for shareholders of high-yield dividend stocks such as Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) – both of which have recorded gains since the data was released. I think Telstra could still be a good buy today, although I'm not so keen on Commonwealth Bank or its big bank brethren.
