September rate cut virtually certain

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Concerns about a "deeper and more persistent slowing of the economy" have caused the Reserve Bank of Australia (RBA) to flag a rate cut as early as September, according to the minutes of the Board's August meeting.

CommSec chief equities economist Craig James tips a 0.25% cut in September, with the likelihood of a follow-up move in either October or November.

"The Reserve Bank's new easing bias had already been apparent from previous statements, but there was further confirmation in the minutes of the last Board meeting," he said.

The minutes revealed the Board's abrupt shift in monetary policy in light of the slowing economy. "Given there had been a significant change in borrowing behaviour, confidence was weaker, asset prices had declined and slower overall growth was in prospect, tighter financial conditions were not warranted," the minutes read. "Indeed, 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."

In effect, RBA Board members believed that monetary policy had become so tight there was the risk of serious damage to the economy, and while they didn't consider a rate cut at the August meeting, "it's clear that they want it on the agenda at the next meeting", James said.

Since the Board meeting a fortnight ago, the global economy has continued to slow, and, domestically, benign wage data removed one of the last remaining obstacles to a September rate cut.

James believes the Board minutes are laying the groundwork for a 25 basis point rate cut in September, but not a larger 50bp move, as retail spending improved in July and any slowdown in the job market was only in the early stages.

"Effectively, the Reserve Bank is preparing to take a little pressure off the brakes due to concern that the economy isn't just slowing but at the risk of coming to a standstill," he added.

 

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