By Michael Witts

What were the reasons behind yesterday's rate decision?
 
The RBA kept the cash rate unchanged at yesterday’s meeting.
 
The RBA suggested that the rise in housing prices, particularly in Sydney, was continuing strongly, and reading between the lines it suggests that there were clear concerns that the actions by other regulators were yet to gain traction. The RBA also noted prices in other asset markets are also rising following the decline in long term interest rates.
 
The RBA again noted that the Australian dollar continues to move lower to achieve balanced growth. The RBA has acknowledged that the Australian dollar against the US dollar has indeed moved significantly lower over the past year. For example the Australian dollar was at US94.5 cents at end of June 2014 compared with US78 cents yesterday.
 
Despite this move the RBA is still looking for the currency to go lower.
 
Should we expect more rate cuts this year?
 
The RBA has retained the option of further rate cuts in the future; the key will be sustainable growth in demand.
 
We would suggest that it is by no means certain that further rate cuts will be delivered by the RBA.
 
While the RBA has retained the option to ease monetary policy further, the economy appears to be gaining momentum in the construction sector, especially commercial construction activity. In addition there is the prospect of the Budget in May being less restrictive than previously expected. Further, there appears to be an increasing appetite for infrastructure spending to underwrite growth in 2016 and beyond.
 
Finally, export revenues will expand in 2016 as various new resource projects commence their productive phases, for example LNG.
 
Has the RBA changed its view on the Australian economy?

 
Fundamentally the RBA has not changed its view on the economy.
 
Moreover, the RBA appears concerned that further rate cuts at this time will flow through to the already overheated property market. It appears there are perhaps some concerns that the actions from other regulators have been slow to impact the market.
 
It could be argued that the RBA may be again trying to highlight the limits to the effectiveness of monetary policy at low interest rates.
 
Has the RBA changed its view on the global economy?
 
The RBA appears to be slightly more optimistic regarding the global economy, notwithstanding a slight slowdown in Chinese growth. The strength of the US economy is anticipated to offset weakness elsewhere. Recent forecasts suggest that the European economy may be slowly starting to emerge from an extended period of subdued growth.
 
What is the RBA’s view on the Australian dollar?
 
Despite the lower value of the Australian dollar the RBA continues to argue for the currency to go lower. Unfortunately it appears the market is not convinced of this path. For example, the Australian dollar is actually higher that at the time of the rate cut in February.
 
In the intervening period, commodity prices appear to have stabilised and it is likely this factor is contributing to the Australian dollar’s relative stronger performance despite lower interest rates.
 
What is ING Direct’s view on the economy?
 
There is clearly very strong activity in housing and related segments. Equally, non-residential construction activity appears to be picking up.
 
Business and consumer confidence appears to be somewhat subdued, however this lack of confidence does not align with reality. Business lending data indicates that bad debts in this segment have been decreasing, yet if business confidence and conditions are under pressure, it is reasonable to assume this would reflect in increased bad debts.
 
To the extent equity markets are a potential forward indicator of conditions in the broader domestic and global economy, the current very strong rally on global equity markets, including Australia, suggest economic conditions are not as bad as they are perceived.
 
In the view of ING Direct, the domestic economy is well placed to continue to advance over the period ahead, despite some patches of weakness against a broader positive outlook.