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RBA expected to keep cash rate at 3.5pc
RBA expected to keep cash rate at 3.5pc

The Reserve Bank of Australia is expected to keep the official interest rate at 3.5 per cent over the next couple of months, following the rate cuts in May and June.

All 15 economists surveyed by AAP said the RBA would not move the cash rate at its August 7 board meeting and only two economists have forecast a rate cut in September.

The last time the central bank cut its cash rate was in June, by a quarter of a percentage point to 3.5 per cent, following a half a percentage point reduction in May.

HSBC chief economist Paul Bloxham said previous cuts are already supporting the interest rate sensitive sectors of the economy, including housing.

"Given that growth momentum in the local economy is solid, we think the RBA is unlikely to cut rates again next week," Mr Bloxham said.

"Despite reports to the contrary, there is still significant support for growth to come from mining, both in the form of further investment and rising exports."

Mr Bloxham said recent economic indicators for Asia show a downturn, and weak conditions in the US and Europe are starting to take their toll.

"China is holding up better, but growth in domestic demand has eased there too," he said.

"Our view remains that the RBA accounted for this global slowdown with the June cut."

The headline inflation rate for the June quarter rose 0.5 per cent, for an annual rate of 1.2 per cent, which was well below the RBA target band of two to three per cent.

Underlying inflation, which smooths out the larger quarterly prices movements, was two per cent for the year to June, official figures released on July 25 showed.

JP Morgan economist Tom Kennedy said such a low inflation rate would normally give the central bank the green light to cut the cash rate, but not on the back of the recent interest rate cuts.

"In addition there's been no trigger point in terms of the offshore data," said.

"Yes it has been weak, although it hasn't really deteriorated to any extent over the past month or so, which really gives us the inclination that the (RBA) board will remain on hold considering there hasn't been any dramatic event yet to cause the RBA to ease policy."

Fourteen of the 15 economists surveyed say there will be a rate cut some time the last three months of 2012, which Mr Kennedy said will be definitely predicated on a decline in the global economy.

"There are definitely a few pressure points on the horizon, particularly in the European region emanating from Spain and Italy," he said.

"We think the problems there will continue to unfold and Spain and eventually Italy will need external (financial) assistance, which will definitely have a knock-on effect to Australia."