Interest rates set to fall further, but not too soon

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John Hilton

The Reserve Bank of Australia has not ruled out further interest rate cuts, however it’s unlikely to slash the official cash rate when the Board next meets on September 3.

Minutes of the August 6 Board meeting indicate the RBA would continue to watch the economic data over the coming months to determine whether monetary policy was “appropriately configured”.

“Members agreed that the Bank should neither close off the possibility of reducing interest rates further, nor signal an imminent intention to reduce rates further,” the minutes said.

The RBA said the fall in the exchange rate could be healthy for the economy, and that the Australian dollar – despite recently dropping to a three-year low - is still high by historical standards.

“It was possible the exchange rate would decline further over time, which would assist in rebalancing the economy, though it would also be affected by developments in other countries.”

The Bank justified their decision to cut interest rates to 2.5% (their lowest level since 1959) by citing low inflation and soft economic data that did not match expectations.

“Members concluded that that a lower level of the cash rate would better contribute to achieving sustainable growth in demand consistent with the inflation target,” said the RBA.

The RBA also acknowledged the considerable easing of monetary policy in the past 18 months, which includes the four interest rate cuts in 2012. However, the last 0.25% rate decrease before August was in May this year.

“At recent meetings the Board had held the cash rate steady, but had judged that the inflation outlook might afford some scope to ease policy further, should that be necessary to support demand,” the minutes said.

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