Reserve Bank of Australia Expected to Cut Rates Further in August

The Reserve Bank of Australia's Governor Glenn Stevens is expected to Australian dollar's outlook within the week as investors are showing confidence in the market. Governor Stevens said he will give the signal whether he will cut rates further in August.

Mr. Stevens is expected to speak in Sydney on July 30 following an 80 per cent probability that the Reserve Bank of Australia will cut interest rates to 2.5 per cent in a meeting with the policy board on Aug 6. Analysts had predicted a 50 per cent probability of further rate cuts earlier in July.

The Australian dollar traded at $US0.9248 compared with the $US0.9292 in July 26. Mr Stevens has sent currency markets into a panic when he announced in Brisbane earlier in July that the Reserve Bank's board had discussed leaving the cash rate at its record low of 2.75 per cent. This gave the implication that the board came close to arriving at a decision to cut rates.

Deputy Governor Phil Lowe calmed the markets the very next day and said Mr. Stevens didn't mean anything about his comment in Brisbane. Despite the statement, it did not stop the jittery trade of the Australian dollar which has dropped to nearly its three-year low.

JPMorgan chief economist Stephen Walters said Mr. Stevens seems to be the unlikely person to guide markets on policy outlook but he is expected to provide insights on the issues affecting policy makers.

The past few weeks has seen news of rising unemployment rates in Australia and economic slowdown of China's economy which is the biggest buyer of Australia's coal and iron ore. The news has sparked fears that the Australian economy is set to remain sluggish, pushing unemployment rates higher.

Sean Callow, Westpac's senior currency strategist, believes that the Reserve Bank of Australia is more likely to restrict negative market behaviour with two more interest rate cuts within the year.

Since late 2011, the Reserve Bank has cut interest rates dramatically as the mining investment boom continues to fade and other sectors of the economy cannot seem to keep up to replace the investment void. Some economists have already warned of the risk of recession but most were hopeful of a sustained period of below standard performance.

The Australian dollar has found some form of relief last week when amid rising expectations that the chairman of the U.S. Federal Reserve will calm growing concerns over the policy stimulus.

The Federal Reserve has said earlier that it plans to keep short-term interest rates close to zero until unemployment rate drops to 6.5 per cent.