RBA Rate Cuts and Weakening Australian Dollar Boost Manufacturing Industry

The cuts on interest rates by the Reserve Bank of Australia may have given the manufacturing sector a boost amid struggling exports due to the weakening Australian dollar.

According to a private monthly survey, the Australian Performance of Manufacturing Index went up by 5.8 points to 49.6 for the month of June. The figure is below the 50-mark which indicates there is improvement in activity.

Innes Willox, the chief executive for the Ai Group said the unexpected boost of the performance manufacturing index was a tentative sign of life in the manufacturing industry. The sector is currently fighting the extreme pressure and its efforts may be finally paying off.

The June performance is welcome news for the Australian manufacturing after experiencing two years of continuous decline. The industry also saw weak performance index figures in April and May of this year.

Having a just under 50-mark means that the industry may be moving towards expansion or contraction. The last performance index that went over the 50-mark was in June 2011. The marginal increase in production was crucial to the rise of performance index.

Deliveries to suppliers as well as new orders were included in the PMI calculation but the data was only a fraction of May's numbers. Employment in the manufacturing industry is still continuous as it had been every month since an incremental increase in October 2011.

The Reserve Bank of Australia's role in reducing cash rates apparently supports the weak local demand. The falling Australian dollar exchange rate may have helped ease local manufacturers in the domestic market.

The Australian Industry Group's performance index signals the nearing expansion of the manufacturing sector for the first time in two years. However, the latest boost in production was not entirely enough to quell concerns about how the economy is trying to rebalance itself due to the slowing mining industry.

The AIG chief says export conditions have remained a challenge the manufacturing industry has yet to overcome.

The policy-setting board of the Reserve Bank of Australia will meet tomorrow. Most economists expect interest rates to hold after RBA slashed the cash rate to its record low of 2.75 per cent in May.