Markets: Signs of a rate cut to come?

When Reserve Bank of Australia governor Glenn Stevens begins speaking just after 1300 AEST at the Four Seasons Hotel in Sydney today, few expect anything but a somewhat optimistic assessment of how the economy is tracking.

But Stevens may say to his audience that the Reserve Bank is nevertheless satisfied with a subdued inflation outlook, wants a lower Australian dollar and is concerned about the jobless rate. Against an uncertain global backdrop, Stevens, may hint that on balance the central bank is prepared to cut its benchmark cash rate to a new low.

Certainly the market thinks so. UBS interest rate strategist, Matthew Johnson, says the market is factoring in an 80 per cent chance of a rate cut at the next Reserve Bank of Monetary Policy Meeting in August. Johnson forecasts the cash rate will drop to 2.5 per cent from 2.75 per cent next month. Citigroup’s chief Australian economist, Paul Brennan, also predicts such a cut.

Brennan says further rate cuts after August “can’t be ruled out”. Johnson says there “is a risk the Reserve Bank will have to keep going” in its easier monetary stance to stimulate an economy that is growing less than its potential 3 per cent without inflationary pressure from its current rate of about 2.5 per cent.

The local economy’s growth rate has been affected by a slowing Chinese economy, which may grow less than an official target of 7.5 per cent. This is crimping demand for Australian commodity exports, although the spot iron ore price has gained 19 per cent since its low this year on May 31. Iron ore imported through the northeast Chinese city Tianjin was at $US131.70 a tonne yesterday compared with $US110.40 on May 31.

Still, consumer price pressures remain weak. In the three months to June 30 the consumer price index rose 2.4 per cent from a year ago. That’s well within the Reserve Bank inflation target of 2-3 per cent. Moreover the Australian dollar, at 91.93 US cents at 1031 AEST, is probably still too high for the central bank’s liking.

The central bank probably wants the currency around 85 US cents or even lower, says Johnson. The jobless rate, which ticked up to 5.7 per cent in June from 5.6 per cent in May, is another concern that may push the Reserve Bank to consider lowering the cash rate.