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Three reasons the RBA will cut rates next week

Three reasons the RBA will cut rates next week

After holding fire in July, the market expects the Reserve Bank to cut the official cash rate to a record low of 1.5 per cent when it meets next Tuesday. 

The board will look at a cocktail of factors, including growth, the reaction to Brexit, how heated the housing market is and what our neighbours are doing. However, there are three reasons the bank is more likely than not to pull the trigger.

1. Inflation is likely to be weak

This week the much-anticipated quarterly inflation figures will be released. Many economists are expecting the numbers will reflect a sluggish trend. 

As forecast last month, when inflation is weak, the RBA becomes inclined to cut its cash rate because it wants to keep inflation within its target band of 2-3 per cent. What we’re more likely to see tomorrow is inflation figures closer to 1 per cent.

When rates are cut, borrowers theoretically have a little bit more to spend, which pushes demand – and in turn the price – of goods and services up. 

2. The dollar has been rising

One of the RBA’s three goals is to keep the currency stable, as a lower dollar makes Australia’s exports more attractive and supports its prime industries.

However, in the last few months a number of factors have seen it rise to highs of around US75c. Speculation of an August rate cut has helped to temper the dollar’s growth, but it’s still higher than the RBA would like. The June CPI data, to be released on Wednesday, should help to push the dollar lower if inflation is weak, as economists expect. 

3. Mixed signals on unemployment 

While the June figures showed a jump in the number of full-time employees, unemployment rose slightly last month, which adds to the RBA’s case for a cut. 

An interest rate cut stimulates growth, which in theory adds jobs to the market. 

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