Business News

Cash rate unchanged at 2.5%

by Michael Witts

What were the reasons behind today's rate decision?

The RBA left the cash rate unchanged at 2.5 per cent, following its monthly Board meeting.

The RBA continues to stress the transition that is underway, yet incomplete, in the economy. While the housing and related sectors are performing strongly, this higher level of activity and confidence needs to flow through to the broader economy.

The comments from the RBA were virtually a carbon copy of previous months and suggests that the unchanged interest rate environment has a considerable period to run prior to any move on rates.

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

The RBA is comfortable with the current status of the economy in combination with the setting of interest rates. Inflation is under control, however, it appears that weakness may have crept into the labour market over the past few months. As the RBA has noted repeatedly on several occasions, the Australian dollar is overvalued when measured against the terms of trade and the level and direction of commodity prices.

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

The RBA has gained increased confidence on the traction of the recovery of the US economy. In contrast, the RBA highlighted that growth in European economies appears to be trending towards a small positive number, whereas previously the Northern European economies were clearly outperforming the Southern European economies.

Despite speculation of increasing stock piles of iron ore, as reflected in lower prices, the RBA remains confident that growth in China will provide continued support for the Australian economy.

In a global context, increased geo-political issues have the potential to derail global economies in the period ahead.

What are the major concerns and what is the RBA's view on the exchange rate this month?

The RBA continues to express concerns that the level of the exchange rate is holding back broad based growth. The RBA would like to see the currency lower, however, until the US Federal Reserve starts to tighten US rates the RBA's hands are tied. This suggests that it could be well into the first half of 2015 before any relief is provided via a lower exchange rate.

What is ING Direct's outlook for the economy?

At ING DIRECT we are confident that the domestic economy is well placed for continued growth in the period ahead. The weakness in the labour market is hopefully temporary. Progress on the budget will aid business and consumer confidence.

The greatest risk to the domestic and global economy is the potential for any one of a number of global hotspots to ignite. In such a scenario, economic forecasts would need to be reassessed.

 

Published on: Tuesday, September 02, 2014

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