Domestic outlook = Interest rate cut

Considering RBA’s the decision to keep the cash rate unchanged, it appears that global macro uncertainty continues to over-ride the RBA’s positive view on the domestic economy and its still moderately hawkish stance on monetary policy. In the meantime, all the recent economic data, particularly the July ISM reading and the 2/4 GDP figures, suggest that the US economy has entered a significant economic slowdown. As a result, I was struck by the disparate growth outlook for both countries.

Clearly, the minutes of the latest meeting reveal the RBA ha belatedly moderated its view on the outlook for the domestic economy. I believe this more conservative view is consistent with the reality of the two speed economy. Despite a strong mining sector which is supported by robust commodity prices and a pipeline of capital expenditure investment, the rest of the domestic economy, particularly retail sales due to consumer conservation and high savings rates, remains very weak.  I continue to believe the Eastern Seaboard remains in a recession. This view is now gaining momentum with a major bank predicting that the RBA’s next policy move will be a cut in interest rates. Others will come to this view over the next few months.



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