A rate cut in August is “justified” but inflation and economic picture “complicated”: AFR's Alan Mitchell

A rate cut in August is not inevitable but underlying inflation trends mean the RBA has the justification it needs to cut the cash rate to 2.5% says the Australian Financial Review’s economics editor, Alan Mitchell.

His analysis of the inflation data and broader economic trends suggest it will be a complicated decision for the RBA.

Mitchell says the situation is complicated due to the need to rebalance the economy and for the RBA to “induce a revival of non-mining business investments”.

This is happening to a degree as the most recent NAB business survey revealed but Mitchell says the “investment outlook still looks soft”.

An issue is the Australian dollar, which stopped depreciating in the first week of July and which has since risen slightly – a fall in the dollar will help non-mining sectors of the economy such as tourism, manufacturing and retail.

Mitchell also highlights the difficulty in assessing the true impact of inflation given the different measures used to work underlying inflation – inflation with volatile components stripped out.

He says one measure of underlying inflation has it running at the bottom of the RBA’s 2% to 3% target band, while another shows it running in the top half of this target.

“The lower of the two measures of underlying inflation is more reliable and a simple average of the two readings still has inflation in the bottom half of the target range,” he says.

Fellow AFR economics writer David Bassanese says while underlying inflation could have been lower, it’s “probably good enough” for a rate cut.