When the Reserve Bank meets today (Tuesday the 6th of August), they will most likely cut the interest rate by 25 basis points to 2.5% for the following reasons; the ordinary inflation figures, lacklustre consumption, recent investment and employment figures and also because Australia is reaching the end of the mining investment boom.

Firstly, inflation figures still appear fairly weak being only 2.4% for the second quarter of 2013 and this leaves the RBA with some room for a rate cut (as inflation is within the 2-3% targeted range). In fact in the final line of the minutes of the last RBA monetary policy board meeting states, “the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand”- hints of a future rate cut.

Secondly, national aggregate figures seem to indicate that Australia is expected to grow below trend at about 2.75% in the next year. Consumer confidence has slumped, business confidence is at a four year low and there has been a rise in unemployment at the same time. The housing market is faring slightly better with rising prices, but a fall in building permits for a second month in a row indicates there is still room for a lot of improvement.

Meanwhile, a slowdown in the Chinese Economy has led to a decrease in mining investment in Australia and an expectation of slowing exports. This outlook culminated with the stabilization of the AU$/US$ exchange rate in recent months and indicates that ceteris paribus, the exchange rate can no longer be relied upon to increase competitiveness (although the exchange rate has dropped quite recently in expectation of a cut). Therefore, the central bank should step in boost the economy.

With markets already pencilling in a rate cut and with recent comments by Glenn Stevens hinting at a cut. it appears fairly certain that interest rates will be cut.

Phillip Womack

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