Rate cut in September is all but confirmed

The Reserve Bank's minutes from its August board meeting released this week confirmed market expectations that the Bank will start cutting the cash rate when it meets in less than two weeks. A 25 point basis cut on September 2 is the most likely scenario, dropping the official cash rate from its current high of 7.25 percent to 7 per cent.

The case for a September cut is now very strong, with data showing deteriorating economic conditions, falling consumer sentiment and a bearish outlook for business. The minutes revealed just how worried the Board is that it has been too tough in its fight to reel in inflation.

“Less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase. On these considerations, a case could be made for an early reduction in the cash rate,” the minutes say.

There is a risk that an abrupt slowing of the economy and a dramatic fall in consumer and business confidence could tip Australia into recession. There has been increasing speculation that the RBA has been too harsh in trying to moderate demand and cool the economy. This only highlights how difficult it is for Governor Glenn Stevens and his team to get monetary just right.

The minutes showed that while the Board is intending to cut rates soon, it is still concerned that an outbreak in wages will put upward pressure on inflation. While prices for resources have weakened in the last month, global demand, particularly from China, is likely to continue for some time. This will provide ongoing support for the economy and the Bank is worried about the extent to which it will stimulate consumer spending.

“Members continued to see considerable uncertainty about the outlook for demand and inflation, as the economy remained subject to powerful forces pulling in opposite directions. Tighter financial conditions were causing the economy to slow but, on the other hand, the rise in the terms of trade would continue to add substantially to national income and capacity to spend,” the minutes say.