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RBA to cut rates?

Speculation is mounting that we could see another interest rate cut from the Reserve Bank of Australia (RBA) tomorrow.

Currently sitting at all-time lows of 2.75%, the official cash rate could be cut another 25 basis points to 2.5%, following last month’s similar cut. Disappointing economic data out recently, including subdued inflation, a weak manufacturing sector, lower than expected retail sales and falling job advertisements could all add up to another rate cut on Tuesday.

Inflation low

Inflation rose 0.2% in May according to TD Securities and the Melbourne Institute, taking annual inflation to 2.2%, which is at the lower end of the RBA’s 2-3% target range. That’s despite the Australian dollar’s recent depreciation, which has yet to make an impact on consumer prices.

More weak data

The manufacturing sector has suffered its 23 consecutive month of contraction, according to the Australian Industry Group’s Performance of Manufacturing Index, released today. At the same time, job advertisements fell for their third consecutive month, according to a survey by ANZ Bank, and were now 28% below their peak in 2010.

House prices remain subdued, despite continued strength in auction sales and clearance rates. Capital city home prices slid by 1.2%, following on from a 0.5% decline in April. Continuing the trend, retail spending rose just 0.2% in April, according to the Australian Bureau of Statistics (ABS) and below economists’ expectations. Department store retailers David Jones (ASX:DJS) and Myer Holdings (ASX:MYR) both recently reported weak quarterly sales of -3.4% and 0.5% respectively. Household goods’ sales also fell in April, signally bad news for white goods retailers like Harvey Norman Holdings (ASX:HVN) and JB Hi-Fi Limited (ASX:JBH).

Foolish takeaway

The recent depreciation of the Australian dollar could see the Reserve Bank take a ‘wait-and-see’ approach this month, to give it some time to work through the economy. Most economists and the market are not expecting a rate cut tomorrow – but then again, neither were they expecting a cut last month.

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Motley Fool writer/analyst Mike King owns shares in JB Hi-Fi.

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