RBA to keep finger off rate-cut button

31 Aug 2012, 1:48 pm   -   Source: AAP
The Reserve Bank is expected to keep interest rates hold when its board meets on Tuesday. (AAP)

The Reserve Bank is expected to keep interest rates hold when its board meets on Tuesday. (AAP)

The RBA is expected to keep the cash rate on hold when its board meets on Tuesday although a rate cut is expected later in the year

The Reserve Bank of Australia (RBA) is expected to keep interest rates on hold when its board meets on Tuesday.

However a rate cut is likely some time in the months afterwards, as a slowdown in China, falling prices for mineral exports, and the continuing euro zone crisis weigh on the outlook for domestic economic growth.

The RBA has keep its cash rate on hold since its June board meeting, at 3.5 per cent, when they were cut by a quarter of a percentage point.

RBC senior economist Su-Lin Ong said the Australian economy performed well in the first half of 2012 but it would need some help from the RBA in the latter part of the year.

"A lot of that comes from a drop in the terms of trade and the knock-on impact to lower national income," Ms Ong said.

"The second part of that story is a softer labour market and we are looking for the unemployment rate to rise as we go into the end of the year and next year."

Ms Ong said the sluggish US economy, the euro zone financial crisis and a slowdown in Asia would be challenging for the Australian economy.

"We think there is still scope for the RBA to lower rates further, admittedly it seems pretty reluctant, so we think they probably won't do very much in the next few months, she said.

All 13 economists surveyed by AAP said the RBA would not move the cash rate at its September board meeting and 11 expect there will be a rate cut in the last three months of the year.

HSBC chief economist Paul Bloxham is also expecting a cash rate cut in the last three months of the year, which will be largely dictated by overseas factors.

"Clearly, European risks remain, though things have stabilised a bit in the past month," Mr Bloxham said.

"China is also slowing more than expected we have revised down our China forecasts.

"Weaker Chinese growth is being reflected in lower commodity prices.

"As a result, we are revising down our Australian growth forecasts for 2013 from 3.5 per cent to 3.2 per cent, but retain our 2012 forecast for

growth of 3.3 per cent."

Some economists are starting to predict that there could be an interest rate rise in early 2013.

CMC Markets chief market strategist Michael McCarthy said the interest rate cutting cycle could end if Europe could successfully back away from a financial calamity and the US economy improved.

The big problem that we've accumulated in the past few years is inflationary," he said.

"As a global market we might be in a very different situation, where the biggest problem is inflation."

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