Why the RBA could cut interest rates in August

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The Australian dollar has fallen sharply against the US greenback on indications the Reserve Bank may look to cut interest rates at its next meeting. While it was recently fetching more than US76 cents, the dollar is now trading for US75.27 cents.


It would seem that the RBA’s board members are more concerned about conditions in our own economy as opposed to the impact Britain’s recent decision to leave the European Union would have on the global economy. In saying that, the minutes do suggest the board members spent much time on the topic.

In the minutes for the RBA’s July meeting, at which they elected to keep interest rates at 1.75%, the members noted that although financial markets had been volatile around the time of the vote, “market functioning had been resilient” in the time since.

What’s more, it believes that any uncertainty caused by Brexit was “expected to have only a modest adverse effect on global economic activity”, with the direct effect on the Australian economy to be “quite small”.

Australian Economy

As of yesterday, the market was pricing in a 62% chance of an interest rate cut when the RBA meets again in August, according to the ASX’s Rate Indicator.

Whether or not that happens will largely depend on upcoming data related to inflation, the labour market and housing market activity which will give the board a better indication of how the local economy is performing.

It said “this information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.

In particular, it is likely the RBA will be focused on inflationary figures which will be made available on Wednesday, 27 July. Inflationary pressures in the first quarter were weak and are expected to remain quite low for some time, which could prompt the RBA into action.

The ongoing strength of the Australian dollar was also cited as a concern by the RBA at their July meeting, at which time the RBA said an appreciating exchange rate could complicate the economy’s ability to make the necessary economic adjustments.

Investor Takeaway

Regardless of whether or not the RBA does cut interest rates next month, it appears highly unlikely they will increase interest rates anytime soon, either. The cash rate appears set to remain low for the foreseeable future, which means that shares offering solid dividend yields, such as Telstra Corporation Ltd (ASX: TLS) and Retail Food Group Limited (ASX: RFG), remain attractive options for local investors.

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Motley Fool contributor Ryan Newman owns shares of Retail Food Group Limited. The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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