Last week's official interest rate cut has sparked plenty of speculation regarding what the central bank wil do next, and it all seems to suggest one thing:
The RBA has more work to do.
In a move that took many market participants by surprise, the Reserve Bank of Australia cut interest rates for the first time in 12 months last week to just 1.75%. Prior to that, some economists had suggested we'd see as many as two cuts in 2016 which would have taken the cash rate to 1.5%, but now that seems like a mild prediction.
Indeed, there is a growing number of big-name economists who now believe the cash rate will fall below that mark by the end of this year.
As highlighted by The Australian Financial Review this morning, Commonwealth Bank of Australia (ASX: CBA) has become the first of the big four banks to suggest we'll be looking at a cash rate of 1.25% by December. They predict the first 25 basis point cut will come in August – when more inflation data becomes available – with another cut to come in November. In saying that, they did note there is a risk those cuts could come even earlier.
JP Morgan believes the RBA will go one step further. According to The ABC, the investment bank thinks the central bank will lower interest rates to 1.5% by the end of 2016, but will follow with another two cuts by June 2017 for a cash rate of 1%.
While those two forecasts alone suggest there is a high possibility of further cuts, the most outlandish forecast appears to have come from BT Investment Management. I pulled the following sentence from their April 2016 'Income & Fixed Interest Newsletter' (my emphasis):
"So the RBA still has scope to ease to help inflation recover and it's quite clear to us that the RBA will be easing to 1%, with a move to 0% or lower a distinct possibility."
Of course, further interest rate cuts would be bad news for most retirees, many of whom have the majority of their wealth stored in the safety of a bank account. What that means is that many will likely look to riskier assets in order to generate a higher return on their savings, with high-yield dividend shares being one of the obvious choices.
As daunting as that may be for some, there are ways to mitigate those risks. While one is diversification, individuals should also pay a high level of attention to business quality and the companies' ability to maintain their dividend payments over time.
With a fully franked yield of 5.3% and 5%, respectively, Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES), which are two of the more traditional dividend payers, could still make for a good option today.
Similarly, Scentre Group Ltd (ASX: SCG), which owns and operates Westfield-branded shopping centres in Australia and New Zealand, offers a 4.6% dividend yield (unfranked). While Cochlear Limited (ASX: COH) currently yields around 1.7%, with the added potential of capital gains as well.
