The Reserve Bank has left official interest rates unchanged at 4.75 per cent at its July board meeting. But rate cuts remain a distinct possibility in coming months and rate rises are now off the agenda this year.

While the Australian economy remains quite robust at the moment, gloom in the international economy rose in June over fears the US economy might drag the world into a deflationary spiral. US Federal Reserve chairman Alan Greenspan has said the chances of deflation in the US are low but the Fed nevertheless cut official rates last week by 0.25 percentage points to 1 per cent, their lowest level since 1958.

Their are conflicting signs about just where the US economy is heading but the RBA has signaled that it stands ready to cut rates to support the Australian economy if things deteriorate. Rate cuts of up to 0.5 per cent are quite possible in coming months. The stubborn US economy is taking its time to lift out of the doldrums increasing the chances that an international-induced slowdown in Australia will gather pace. A double hit to exports may well be under way with slowing world demand compounded by a rising Aussie dollar.