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August rate cut unlikely

While weak inflation figures have given the Reserve Bank room to cut the cash rate again this month, industry stakeholders believe the Board will opt to keep its powder dry. In the 12 months to June, the inflation rate hit a 13-year low of 1.2 per cent – down from 1.6 per cent in the year to March. Despite this I think the Reserve Bank will still opt to err on the side of caution and leave rates on hold for another month. The Australian economy had been performing relatively well over the last four weeks, giving the Reserve Bank reason to hold fire on another rate cut.

The Reserve Bank definitely has scope to cut rates if they so wish given the lower than expected inflation rate. That said, given that there has been improvement in home values over the last couple of months, and the economic data recorded over the last four weeks has significantly improved on the four weeks prior to that, I think the Reserve Bank will be happy to sit this one out and see if the cash rate cuts they have made to date continue to inject a bit more confidence into the market. It certainly looks as if the RBA has room to move if it has to, but we also know they seem to have a bit of patience at the moment. The timing of the next move will depend a lot on what happens globally.