The Reserve Bank of Australia has just cut the official cash interest rate by 0.25% to a fresh record low of 0.75%.
No Great Surprise
Today’s interest rate cut had been widely anticipated by financial market participants and is therefore unlikely to have a major short-term effect on share prices.
The RBA cut brings the official cash rate to under 1% for the first time since the Reserve Bank took on the task of overseeing the country’s monetary policy way back in 1960.
The RBA will be hoping this rate cut, in combination with previous cuts, will serve to stimulate growth in the economy.
Quantitative Easing (QE) – Australia Style
In recent times there has been more talk of quantitative easing (QE) coming to Australia in the form of money printing and the central bank buying bonds. A consensus on QE is hard to find with fierce supporters on both sides of the debate.
However, we can look across the pond to the USA for a recent case study on the effects of QE. I think it’s fair to say that the US QE story is yet to play out.
Despite a massive rally in asset markets since the GFC, it’s questionable whether the USA’s Federal Reserve will ever be able to normalise interest rates or reduce its astronomical debt pile — without imploding the economy.
Japan provides another example. One that is probably less appealing to supporters of the controversial QE policy.
No-one knows for certain what will happen next. But whatever the case, we may not have to wait too long to find out, given the very real possibility that the RBA’s official interest rate could be cut further in coming months.
Dividend Shares To The Rescue?
Ultimately, leaving money sitting in the bank really is losing you money. It’s been getting worse for a number of years.
After accounting for inflation (1.6%), it’s likely that money left in a bank account earning 2% will go backward after tax and inflation.
One way to beat the ultra-low interest rates is to invest in profitable and well-managed businesses that pay regular dividends. There are a number of such companies listed on the ASX and you can be sure that we here at Rask Media will continue to bring you all the news and analysis on these potential opportunities.
Some of the most reliable dividend-paying shares on the ASX include Commonwealth Bank of Australia (ASX: CBA), Sydney Airport (ASX: SYD), Transurban Group (ASX: TCL) and Woolworths (ASX: WOW).
It’s important to avoid simply investing in a company for the dividend yield alone as dividends are never guaranteed and could always be cut. Just ask any long term Telstra (ASX: TLS) shareholder!
You must also remain acutely aware of valuation for any dividend-paying share because no share is worth an infinite price.
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At the time of publishing, Luke has no financial interest in any companies mentioned.
