Rate cut almost certain, say economists

THE minutes of the Reserve Bank's August board meeting have all but confirmed there will be an interest rate cut next month.

Rate cut almost certain, say economists

THE minutes of the Reserve Bank's August board meeting have all but confirmed there will be an interest rate cut next month.

But the minutes gave little encouragement to market speculation that the central bank could cut the official cash rate by 50 basis points, economists say.

The minutes of the meeting, at which the cash rate was left unchanged at at 12-year high of 7.25 per cent, said "a case could be made for an early reduction in the cash rate".

Board members were conscious that financial conditions were "clearly quite tight and effectively getting tighter as a result of ongoing pressure on lenders cost of funds in the market", the minutes said.

"Given there had been a significant change in borrowing behaviour, confidence was weaker, asset prices had declined and slower overall growth was in prospect, tighter financial conditions were not warranted," the minutes said.

"Indeed, less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase."

AMP Capital Investors chief economist Shane Oliver said the minutes confirmed market expectations that there will be an interest rate cut next month.

But Dr Oliver said the it was more likely to be 25 basis points, rather than 50 basis points. "All they are really saying here is that if they don't move towards less restrictive conditions, the risk of a deeper or more persistent slowing of the economy would increase," Dr Oliver said.

"They don't want that, which is an argument to cut rates, but by the same token the language is not strong enough to suggest they are heading towards a 50 basis point cut next month.

"I think it is consistent with 25 basis points next month."

The RBA left the cash rate unchanged in August for the fifth straight month.

But through its quarterly statement last week, the RBA said there was increasing "scope" for a less restrictive stance on monetary policy in the period ahead.

Those sentiments were repeated in the minutes.

The Australian dollar reacted positively to the news.

The local currency was trading at $US0.8655 just before the minutes were released at 11.30am (AEST), but rose to $US0.8675 shortly afterwards.

The RBA's next board meeting is on Tuesday, September 2.