RBA may cut rates as early as September

The Reserve Bank left rates unchanged when it met for its monthly board meeting on Tuesday this week. Governor Glenn Steven's statement revealed that the Bank has markedly softened its stance on monetary policy and given its strongest indication yet that the next rate move will be down.

His statement said: "Weighing up the available domestic and international information, the Board judged that the cash rate should remain unchanged this month. Nonetheless, with demand slowing, the Board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing."

It seems that clearer signs of a slowing economy and weakening demand have been enough evidence to give the Reserve Bank confidence that inflation will moderate. Many market commentators are predicting that the Bank could move as early as September to cut the official cash rate from its 12-year high of 7.25 per cent. Most are certain that at least one cut will come before the end of 2008. This would be the first rate cut since late 2001 and many are predicting a 0.5 percentage point cut, bringing the official rate down to 6.75 per cent.

The biggest issue that could potentially delay the Bank from moving next month is wages pressure. The Bank will closely scrutinise the wages data to be released next week to see whether the tight labour market is putting upward pressure on wage claims. The market was surprised to see this week that the Australian jobs market is still holding up well despite signs of deterioration in the broader economy. Data released this week from the Australian Bureau of Statistics showed that there were 10,900 new jobs created in July, which was above market expectations of a 5,000 increase in jobs. The unemployment rate stayed steady at 4.3 per cent.

A rate cut seems to be definitely on the RBA's agenda, the biggest issue is when.