By Peter Casey*

What were the reasons behind yesterday's rate decision?

The RBA decided to keep the cash rate at 2.00% today, which they describe as being “accommodative”. Inflation is low enough to justify rates at this low level, however they don’t see the economic picture as being weak enough to justify another rate cut.

They commented that domestic growth has been below its long-term average for some time now. The global economic performance has been mixed, with the US experiencing stronger growth, while China and East Asia have been a bit softer.

The local labour force numbers have seen the unemployment rate steady for some time – albeit at levels that are probably a bit higher than most economists would expect.

The RBA is also mindful of the recent increases in house prices in Sydney and Melbourne. So they are being careful not to set off another round of increases. 

Did they make the right decision?

It’s a balancing act for the RBA. If it were not for the strong property markets in Sydney and Melbourne, they could probably justify another rate cut. 

Do you think rates will be on hold for the rest of the year?

We think that it is most likely the RBA will keep the cash rate unchanged for the rest of the year.

However, if property prices moderate next year, and if growth remains below the long run average, then we think there will be scope for the RBA to cut the cash rate. Inflation is well within the 2% to 3% target band, currently at 2.3%.

The market has priced in 25 basis points of rate cuts by quarter one next year – there are good reasons that this may be correct. 

Are Sydney property prices a challenge for the Reserve Bank?

This remains a key concern for the RBA and is largely standing in the way of a rate cut.

The RBA has again pointed to the regulatory measures implemented by APRA as a strategy for containing these risks. It will take some time to judge whether these measures are working.

What is the RBA’s view now on the Australian economy and the Aussie dollar?

They acknowledge that growth is running at below trend. It looks as though they are not looking for acceleration in the near term, mentioning that they expect “spare capacity for some time yet”.

The terms of trade have fallen as commodity prices have fallen. This has been a result of reduced economic growth globally. The lower Australian dollar has helped to cushion this impact. 

And the global economy?

They described global growth as “moderate” but there is a lot of divergence, with the US looking to be improving, while Asia is a bit softer than hoped for. 

What is ING Direct’s outlook for the economy and the Australian dollar? 

We think that the Australian economy remains in a transition phase from the mining investment boom through to a more sustainable long-term footing. 

There has been some encouraging news on this front, such as the recent increase in building approvals. However, at the same time, we have seen unemployment stuck at 6.2% and consumer confidence weaker than we might expect.

There is definitely room for the economy to grow more quickly than its current 2.0% pace.

The Australian dollar is at 71 cents today, compared to 95 cents in the middle of last year. This is a level that is helping exporters of services such as tourism and education, which in turn will help with the transition away from the investment phase of the mining boom. We think this is an appropriate level for the Australian dollar.

We saw last month that the US Fed decided not to increase rates due to global uncertainty. We have also seen countries from Norway and Canada to New Zealand cut their cash rates in recent months. With this backdrop, especially in other commodity-heavy economies, the market will keep looking for the RBA to cut the cash rate.

* Peter Casey is deputy treasurer at ING Direct