Here comes a rate cut

RBA likely to cut cash rate on Tuesday after weak retail sales data

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 5, 2013 12:52 pm AEST

The odds of the Reserve Bank (RBA) cutting the official cash rate tomorrow have shortened, after retail sales remained flat in June.

Retail sales were flat at 0% for June, after a revised 0.2% increase in May and 0.1% decline in April. Economists had been expecting a 0.4% rise in June. The Australian dollar fell to a new three-year low of 88.58 US cents after the data was released, on expectations that the RBA is more likely to lower the official cash rate at its monthly board meeting tomorrow.

Markets are now virtually asking how big will the cut be rather than whether the central bank will cut. Financial markets are pricing in a 91% chance of a rate cut after the weak retail sales results. A 0.25% cut to 2.5% is still the favoured reduction, but the chances of a 0.5% drop are rising.

Consumers aren't responding to rate cuts as they have in the past, refusing to go shopping and instead paying down their debts, and accumulating savings in bank accounts. Food retailing continues to be the strongest contributor to growth, rising 0.2%, suggesting consumers are staying at home more.

For struggling retailers like David Jones Limited (ASX:DJS), Myer Holdings (ASX:MYR), JB Hi-Fi Limited (ASX:JBH) and Harvey Norman Holdings (ASX:HVN), the news suggests the weak retail conditions could continue for some time.

Economists have also suggested the Australian dollar is still too high, and needs to drop further. RBA Governor Glenn Stevens noted last week that despite the dollar falling below US 90 cents, it had done little to change the outlook for inflation.

Foolish takeaway

Many economists are now suggesting that at around 80 US cents, the Australian dollar would start to reinvigorate the economy, helping our exporters, and reducing our spending on imports as their prices headed upwards. I wouldn't be surprised if the Reserve Bank cuts rates by 0.5% tomorrow.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

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