Are rates set to drop on Melbourne Cup day?

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The Reserve Bank board has strongly hinted that an interest rate cut may be on the cards at its next meeting on Melbourne Cup Tuesday.

Few analysts were surprised this week when the RBA’s decision makers kept the official cash rate on hold at 4.75% for the tenth consecutive month, but comments made by RBA governor Glenn Stevens have led to speculation that a rate cut will be announced next month.

Stevens explained in his monetary policy decision statement that the RBA board had been concerned about rising inflation earlier in the year, “but over recent months has been weighing the question of whether a period of weaker than expected conditions would contain that pick-up in inflation”.

Citing a lower than expected pick-up in price rises, softer labour market conditions and increased concerns about unemployment, Stevens now believes that inflation may be kept in line with RBA targets.

“Taking into account all the recent information, the path for inflation may now be more consistent with the 2–3% target in 2012 and 2013,” he said. “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”

Commenting on the interest rate outlook, Loan Market chief operating officer Dean Rushton added that the deteriorating global economic environment, as well as a sluggish domestic economy outside of the mining boom, are the main factors that could see rates slashed.

"While there is considerable debate regarding when it's going to happen, there is a growing sentiment toward the next rate decision being downwards," he said. “Ultimately, Australians are seeking actions, such as a drop in interest rates, for full confidence to return and increased activity across struggling sectors such as manufacturing and retail."

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