What were the reasons behind yesterday's rate decision?

At its meeting yesterday the RBA left the cash rate unchanged at 2%. This decision was widely expected as over the past month little fundamentally important economic data has been released. In addition, the Federal Budget, announced in May, contained a number of measures directed towards the non-interest rate sensitive sectors of the economy. In this regard the accelerated depreciation allowances are important.

While the RBA did not explicitly state the re-adoption of an easing bias, they noted that additional information will be needed to ascertain if further policy easing may be required to effectively foster sustainable growth.

In this regard the upcoming economic growth figures, although backward looking, will provide an accurate picture of the whole economy as at the end of March quarter. Our forecast is for growth during the March quarter of around 0.6%, or 2.3% for the year to March.
Did they make the right decision?

The RBA has previously indicated a willingness to allow prior stimulus to work through the system and on this occasion it appears they are adopting a similar approach.

This is prudent, especially at this stage in the cycle and given the price momentum in the housing sector.

The RBA implicitly stated that if the economy needs further support they have the capacity and willingness to act as and when they deem appropriate. The likely course and timing of their action will in part be influenced by the level and direction of the Australian dollar, which itself will be a function of changes in US interest rates as a result of US Federal Reserve action.
Is there a property bubble in any parts of Australia? Are Sydney property prices a challenge for the Reserve Bank?

Double digit increases in home prices are not sustainable in the longer term, especially when it is not matched by similar growth in household income.

Homebuyers and property investors should not expect/rely on sharp increases in property prices.

The RBA again highlighted strong house price rises in Sydney and also underlined that together with other regulators they are working to assess and contain risks that may arise in the housing market. 

In recent weeks we have seen a number of banks amend their lending conditions following consultation with APRA and a broad industry review by APRA.
What is the RBA’s view now on the Australian economy and the Aussie dollar?

The RBA is downbeat, however also realistic in terms of their assessment of the economy in the period ahead. Growth is somewhat below its longer-term trend and the economy appears to be operating with a degree of spare capacity, a situation that is likely to prevail for a period of time.

The RBA continues to argue that a lower exchange rate is a prerequisite for more broad-based growth in light of the deterioration in the terms of trade.

It is generally agreed that the low point for the Australian economy will be during 2015. Onto 2016 and beyond, increased exports, as resource related projects come on stream especially LNG, will underwrite a strong economy over the ensuing period.
And the global economy?

The RBA is optimistic regarding the global economy, in particular they highlighted that the US is gaining sufficient strength and momentum and that the US Federal Reserve will start to look to normalise rates toward the end of 2015.

It is interesting that the RBA did not mention Greece. It appears increasingly likely that Greece is edging towards a terminal end state. If this is the case, market volatility will surely follow. The question will be to what extent the resulting volatility can be quarantined to within Europe.
What is ING Direct’s outlook for the economy and the Australian dollar?

It is widely expected that the Australian dollar will move lower in the period ahead, especially as and when the US Federal Reserve starts to move rates higher. This will be a positive for the economy.

The domestic economy will continue to benefit from a low interest rate environment and accommodative monetary policy. It appears likely that there will be an extended period of steady rates, which should contribute to further strengthening business and consumer confidence. An increase in interest rates appears some way in the future and then it is likely to be a gradual drawn out process, with the likely peak in rates well below peaks of previous rate cycles.