RBA ready to cut rates

In a somewhat ironic turn of events, the Reserve Bank’s (RBA) note that the decline in the Australian dollar could reduce the chance of a rate cut next month, propelled the Aussie dollar higher today.

The minutes from the central bank’s July meeting were released today, after the RBA left the official cash rate at an all-time historic low of 2.75%. The minutes show that the central bank identified the falling Aussie dollar as the most significant change in recent months, which could help to foster a rebalancing of growth in the economy.

The RBA noted that recent cuts to the official cash rate seem to be having the desired effect, but given the time lag between rate cuts and seeing an effect on the economy, they still had some way to run. That seems to indicate that the RBA is happy to keep rates at the current level for some time.

The key will be the inflation (consumer price index, or CPI) data from the Australian Bureau of Statistics (ABS), which comes out on July 24. While the lower Aussie dollar is expected to see a rise in inflation, most economists and the RBA expect CPI to come in between the 2-3% target band. Should CPI be lower than expected, we could see a rate cut by the central bank in early August.

As the mining boom slows down, other sectors, such as retail and construction, which were expected to pick up the slack, are still struggling. Consumers appear to have turned off the spending tap in recent months, which could lead to disappointing results from the likes of JB Hi-FI Limited (ASX:JBH), Harvey Norman Holdings (ASX:HVN), David Jones Limited (ASX:DJS) and Myer Holdings (ASX:MYR).

Foolish takeaway

The RBA will have its eyes on the CPI figures, but will also get another round of economic data which it can use to determine whether a rate cut is required. Between now and its August 6 board meeting, retail sales, monthly housing, housing prices, building approvals, new home sales and credit figures will all come out. At this stage, quite a few economists are predicting an August rate cut.

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

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