by Michael Witts

What are the reasons behind today's rate decision?


The RBA left the cash rate unchanged at its meeting today, as fundamentally nothing significantly has changed from last month. Indeed this is best reflected in the statements from the last two meetings, a maximum of 10 words have been changed between the two statements and the underlying message is exactly the same.

Past rate cuts are working through the economy, and the Bank is happy with this progress, however, the Bank would like to see the AUD lower in value.

What is the RBA's reading on the Australian economy?

The RBA is reasonably comfortable with the progress the economy is making towards a path of balanced growth as the dynamic shifts away from resources related sectors. Consumer spending and demand for finance is continuing to positively respond to the momentum provided by past rate cuts.

The Bank notes that a lower level of the exchange rate is likely to be needed to achieve balanced economic growth.

How worried are they about the Aussie dollar and would a rate cut have a big effect?

The RBA is currently trying to talk the currency lower, which has been successful over the past several weeks. Further rate reductions would likely feed into the housing market, which is already bordering on being over heated in some segments.

The AUD is unlikely to move convincingly below 90 US cents until the US Fed starts to commence its tampering activities.

What are the main concerns for the RBA right now?

The Australian economy is currently operating marginally below trend, with the labour market slightly weaker than desirable. Prices and wages growth continues to be well behaved.

The GDP data that is due out later in the week is likely to be slightly above expectations at around 1% for the September quarter and 3% year on year.

And what's the RBA's view on the global economy?

The RBA is optimistic on the outlook for the global economy into 2014. The US continues to show ongoing growth, increasing the likelihood of the US Fed beginning to withdraw their liquidity stimulus. Europe appears to be managing better than expected in terms of its recovery process, Asia including Japan are continuing to provide ongoing demand for Australian resources. Japan in particular has the capacity to surprise on the top side in terms of growth over 2014.

What is ING Direct's outlook for interest rates and the Australian economy?

At ING direct we think the RBA will be on hold for an extended period well into the first half of next year. We see the currency moving lower in response to the commencement of the tampering by the US Fed. We expect this to commence early in 2014.

The lower AUD together with renewed global growth will underwrite growth in the domestic economy in the year ahead.