Falling dollar means interest rate cut unlikely

Economists are forecasting the cash rate to remain at its record low of 2.75% when the RBA meets this week.

When the RBA last cut the cash rate, in May, the Australian dollar was still above parity with the greenback. The RBA board said low inflation had allowed it to make the reduction and it cited the high Australian dollar as one of the reasons why conditions remained tough for business.

But the Australian dollar has since lost more than 10 US cents and has hovered between 91 and 93 US cents since last week when US Federal Reserve chairman Ben Bernanke signalled a possible wind-back of the US central bank’s economic stimulus.

CommSec economist Savanth Sebastian said the RBA would likely wait until June quarter inflation figures were released, on July 24, with a rate cut likely in August.

He said the pull-back in mining investment was occurring faster than expected and non-mining sectors needed to be inspired to invest and fill the spare capacity in the economy.

AMP Capital senior economist Bob Cunneen also expects a cut in August, unless the local currency continues to fall sharply.

“The RBA should be cutting interest rates in coming months given the sedate economic activity in the non-mining sectors, subdued business and consumer confidence, as well as a sluggish labour market,” he said.

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