Rate cut could hinge on Q2 inflation

Lucy Hughes Jones

(Australian Associated Press)


The Reserve Bank of Australia has downplayed Brexit fears but economists expect another weak local inflation print to pave the way for an interest rate cut next month.

In the minutes of the July meeting, released on Tuesday, the central bank said updates on consumer prices, the jobs market and housing activity in the coming month would be important.

“This information would allow the board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate,” the RBA said.

But board members appeared unfazed by Britain’s decision to leave the European Union, saying the considerable financial market volatility caused by the referendum had since settled.

“This uncertainty was expected to have only a modest adverse effect on global economic activity,” the RBA said.

The central bank said markets were resilient throughout the episode, and the direct effect on the Australian economy was likely to be quite small.

There are concerns on the economic home front, however.

Benign price pressures are widely tipped to push the central bank to slash the cash rate to a new record low of 1.5 per cent in August.

That’s if next week’s all-important second quarter inflation figures continue to show signs of a soft economy, and board members flagged a gloomy outlook.

“Inflation was still expected to remain quite low for some time given very subdued growth in labour costs and very low cost pressures elsewhere in the world,” the RBA said.

JP Morgan expects a 0.4 per cent rise in core inflation, and for interest rates to drift down to one per cent in the first half of next year.

“A print of this magnitude will simply confirm that the trend in core inflation is soft, and that a further easing in policy will be required,” JP Morgan chief economist Sally Auld said.

“Recent housing and labour force data present no impediment to further easing.”

Also, the unemployment rate rose to 5.8 per cent in June, even as the number of people with jobs rose by 7,900.

And, the central bank noted, conditions had also been mixed in the property market of late.

“The RBA has acknowledged in recent months that it is staring down the barrel of a significant rise in the supply of dwellings,” Ms Auld said.

“This may boost growth now, but will be disinflationary down the track.”

The board was also concerned that the rising Australian dollar could disrupt the economy’s transition away from non-mining led growth.

But CommSec economist Savanth Sebastian warned that a rate cut may not have the desired effect of driving the currency down.

“Most central banks that have eased monetary policy in the past have seen their currencies continue to strengthen,” he said.



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