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Rate cut in August?

The Reserve Bank of Australia (RBA) will cut official cash rates in the first week of August, according to National Australia Bank.

In the bank’s monthly business survey released today, business conditions have slumped to a four year low. NAB noted that ‘very bad’ conditions exist in retail, mining and manufacturing, despite the low interest rates and falling Aussie dollar. The June survey paints a worrying picture of the Australian economy says the bank, with business conditions at their lowest level since May 2009. The bank noted that weak forward indicators remain concerning and suggest little improvement in near-term demand.

Retail conditions collapse

Retail activity has deteriorated to its weakest level in the history of the monthly survey (since 1997), down 17 points to -28, suggesting bad news is coming for shareholders in the likes of Myer Holdings (ASX:MYR), Harvey Norman Holdings (ASX:HVN) as well as the discretionary retail arms of Wesfarmers Limited (ASX:WES) and Woolworths Limited (ASX:WOW).

Mining down

Business conditions in the mining industry also fell, dropping 15 points to -28 points. With commodity prices falling, miners are running around, cutting costs and jobs, selling off non-core assets, cutting back on exploration and optimising their core operations. Junior miners are struggling to obtain finance to progress their projects, and many face the prospect of going into hibernation, until conditions improve.

As a result of domestic weakness implied by the survey, softness in China, financial market volatility and a weaker terms of trade all point to the RBA cutting rates in August, says NAB. Several economists have also forecast that employment is expected to rise, adding further pressure on the central bank to cut rates.

Foolish takeaway

With the cash rate at a record low of 2.75%, it could go even lower next month. That will put more downward pressure on the Australian dollar, helping our exporters, while mortgage borrowers could see a haircut to their variable interest rates.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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