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Economy needs RBA's help to stay strong

Economy needs RBA's help to stay strong

Fri August 31, 2012 4:02pm

The Reserve Bank of Australia is expected to keep interest rates hold when its board meets on Tuesday.

However a rate cut is likely some time in the months afterwards, as a slowdown in China, falling prices for mineral exports, and the continuing euro zone crisis weigh on the outlook for domestic economic growth.

The RBA has keep its cash rate on hold since its June board meeting, at 3.5 per cent, when they were cut by a quarter of a percentage point.

RBC senior economist Su-Lin Ong said the Australian economy performed well in the first half of 2012 but it would need some help from the RBA in the latter part of the year.

"A lot of that comes from a drop in the terms of trade and the knock-on impact to lower national income,'' Ms Ong said.

"The second part of that story is a softer labour market and we are looking for the unemployment rate to rise as we go into the end of the year and next year.''

Ms Ong said the sluggish US economy, the euro zone financial crisis and a slowdown in Asia would be challenging for the Australian economy.

"We think there is still scope for the RBA to lower rates further, admittedly it seems pretty reluctant, so we think they probably won't do very much in the next few months, she said.

All 13 economists surveyed by AAP said the RBA would not move the cash rate at its September board meeting and 11 expect there will be a rate cut in the last three months of the year.

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