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RBA open to further rate cuts

The Reserve Bank of Australia (RBA) is open to further rate cuts should they be needed, according to the minutes of its August 6 meeting.

“Regarding the communication of this decision, members agreed that the bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further,” the minutes said.

The central bank lowered the official cash rate to a record low of 2.5% at the August 6 meeting, with low inflation, the high Australian dollar and slowing economic growth all contributing to the decision. Board members also noted that household consumption, including motor vehicle sales, retail sales and consumer sentiment, suggested continued moderate conditions.

The outlook for employment growth was weaker than in May, and was expected to remain modest, although unemployment has inched higher to 5.7% in June.

Members also noted that the path the Australian dollar followed would be important. Previously, the RBA has noted that they were concerned about the high level of the Australian dollar. Should the Aussie dollar fall from its current level of around 92 US cents, it could drive further growth in the economy, allowing the RBA to keep rates on hold. But should the dollar start going up, we could see the RBA come out with more rate cuts.

A lower exchange rate would be especially good for our bulk commodity exporters such as BHP Billiton (ASX:BHP), Rio Tinto (ASX:RIO), Fortescue Metals Group (ASX:FMG) and Atlas Iron (ASX:AGO). The current iron ore price of around US139 a tonne, equates to more than A$150 a tonne, giving the miners a handy profit margin.

Foolish takeaway

We may not see a rate cut next month, but if the economic data takes a turn for the worse, it seems the RBA is quite prepared to cut interest rates further.

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

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