Falling $A casts doubt over more rate cuts

THE Reserve Bank has left the door open for another interest rate cut - unless the falling Australian dollar keeps doing its heavy lifting.

In the minutes of its July meeting released on Tuesday, the RBA said it decided to leave the cash rate on hold at the record low of 2.75 per cent as it assessed the effects of earlier interest rate cuts as well as the falling, but still high, Australian dollar.

"The effects of lower interest rates were apparent across a range of indicators and, given the lags involved in the transmission of monetary policy, this process had further to run," the RBA said.

The RBA said there was a chance the economy could get a further boost from the falling Aussie.

"Members noted that it was possible that the exchange rate would depreciate further over time as the terms of trade and mining investment declined, which would help to foster a rebalancing of growth in the economy," it said.

The RBA said the inflation outlook, although slightly higher because of the falling Australian dollar, could provide scope for a further rate cut if required to support spending.

It said recent data confirmed that the economy was growing at a below trend pace, with non-mining sectors failing to pick up ahead of an expected decline in resource sector investment as the mining boom slows down.

RBC fixed income and currency strategist Michael Turner said the RBA sounded less dovish than expected.

He said the weakness of data released since the July 2 meeting meant that a benign inflation reading when consumer price index (CPI) figures are released on July 24 would clear the decks for another cut in August.

"There has been plenty of water to flow under the bridge since the July meeting, including a 5.7 per cent unemployment rate, falls in job ads, and a weak NAB business survey domestically and slightly weaker China data offshore," Mr Turner said.

"Yet even with these caveats in mind, the tone of the July minutes was a little less suggestive of near-term easing than we had expected.

"There was no mention of a 'finely balanced' decision. And there was little sign of long deliberation contrary to governor Glenn Stevens' now infamous remarks in a speech the day after the July meeting.

"Instead, the board pointed to the fall in the exchange rate and the 'substantial degree of monetary stimulus already in place' as reasons to stand pat."

CommSec economist Savanth Sebastian said that while an August rate cut was still expected in order to support weak business conditions, the minutes diminished the prospect of multiple reductions.

"I think the Reserve Bank believes the Australian dollar will do a lot of its heavy lifting in terms of rebalancing the economy and that means that they may not need to cut as deeply over the next few months as previously thought," Mr Sebastian said.

"It really does come down to inflation now."

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