More rate cuts to come

Central bank still concerned about high Aussie dollar and sluggish economy

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Australia’s central bank has signalled that it could deliver more rate cuts in minutes released from the Reserve Bank’s (RBA) June meeting.

The RBA’s board said that the current inflation outlook could provide scope for further easing, if required, to support demand. That could mean more rate cuts to the official cash rate, which currently stands at 2.75%.

Central Bank policy makers noted that while the Australian dollar had depreciated noticeably against the US dollar – the Aussie has slipped from around US$1.04 to 95.4 US cents – it was still at a high level, given the decline in export prices in the past 18 months. Further falls could help to foster a rebalancing of growth in the economy, as the terms of trade declined, said the RBA.

As most lenders in Australia had lowered their standard variable housing rates in line with the reduction in the cash rate, borrowing in the household sector looks to be picking up, and the housing market appears to be improving. Building approvals for both higher-density and detached dwellings had increased over recent months, and loan approvals had grown strongly. Auction clearance rates in both Sydney and Melbourne were close to or over 70%, with the second highest number of auctions recorded for the post-holiday weekend of all time in Melbourne.

For the big four banks, ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC) that will be good news after struggling with weak credit growth since the Global Financial Crisis.

The RBA however did note that conditions in the non-mining sector remained subdued, and appears likely to remain subdued for some time.

Foolish takeaway

With growth in the mining sector slowing rapidly, and subdued growth in other parts of the economy, the central bank may be forced to cut official cash rates further, to stimulate the economy, and encourage some growth. That’s good news for home owners, with the prospect of further rate cuts this year – bad news for those with funds stashed in term deposits.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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