Tuesday, June 21, 2016

Low inflation, rising dollar, moderating jobs. August rate cut firming?

The outlook for low inflation and a rising Australian dollar could lay the foundations for another cut in official interest rates, the Reserve Bank has signalled.

In the minutes from its June meeting when the cash rate was kept on hold at 1.75 percent, the RBA says measures of both short term and long term inflation remain below average.

Low inflation and fears about deflation drove the RBA to deliver an interest rate cut in May, coinciding with the release of the Federal Budget.

Reflecting on a world of low inflation and the potential impact here, the RBA says "monetary policy was very accommodative in the major economies and was expected to remain so given that inflation was below most central bank targets."

Consumer inflation in Australia is running at 1.3 percent - well below the RBA's target range of 2 to 3 percent over time.

The RBA says while the Australia dollar had depreciated around four percent against the US dollar, a recent recovery "could complicate the adjustment of the economy to lower terms of trade."

The central bank is also watching the labour market and says despite strength seen at the end of 2015 there had been "some moderation" in employment growth this year.

While there has been recent evidence that the transition out of the mining investment boom is occurring, the RBA is seeing "a further sharp fall in mining investment and a decline in non-mining investment in 2016/17."

On housing, the RBA noted that while residential building approvals increased strongly in April, this could be balanced by a flood of apartments coming on to the market in the next two years.

The RBA says there continue "to be indications that the effects of supervisory measures" have strengthened lending standards by major banks.

The RBA also cited the coming "Brexit" referendum on Britain's membership of the European Union as a factor increasing market volatility.

On China, the RBA says measures by Chinese authorities to curb speculation in commodity prices had led to recent falls in spot iron ore prices.

While money markets are factoring in a small chance of a rate cut in July, expectations are growing that the RBA will cut again in August after fresh consumer inflation data is released in late July.

Follow Peter Ryan on Twitter @peter_f_ryan

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