What were the key points in the Reserve Bank statement?

The RBA left the cash rate unchanged at 2.0% following Tuesday's Board meeting.

In terms of the domestic economy, the RBA was somewhat upbeat about the current state and immediate prospects for the Australian economy. Business surveys have moved to above average levels, employment growth is solid and the unemployment rate is trending lower. The pace of lending to business has increased, and the mix in lending to the housing sector has moved in favour of owner-occupiers at the expense of investors.

The dark cloud on the horizon is the extent to which recent equity market volatility, particularly in China, has a lasting adverse impact on the global and in turn Australian economy.

The current low level of inflation and the very strong likelihood this will continue into the future provides the RBA with scope to further adjust the cash rate if this is required to underpin the economy.

What has changed since the RBA’s last meeting in December? Has their statement changed?

Clearly the highly volatile global equity market conditions that prevailed during January were unexpected, and if anything the RBA’s current view of the Australian economy has improved over the final quarter of 2015.

The RBA will be closely watching the lasting impact of the equity market volatility, and in particular the impact on China and other trading partners in the Asian region. Equally they will be monitoring developments in the labour market to assess the potential transmission impact on the Australian economy.

The RBA appears to be well satisfied with the progress of the exchange rate adjusting to the lower terms of trade; potentially there is further to go on this front. The market belief is that the RBA would prefer to see the AUD below 70 cents.

Has the RBA’s view on the housing sector changed? If so, what has changed and what is the outlook for the sector this year?

As with the exchange rate, the RBA and APRA would feel satisfied with their efforts to cool investor activity in the housing sector. The RBA cited that regulatory measures are working to emphasise prudent lending standards and contain risks in the housing market which is leading to a changed composition between lending to investors and owner occupiers.

The RBA further noted that housing price growth has moderated in Sydney and Melbourne, while being subdued in other cities.

What is the RBA’s view on monetary policies being adopted in major economies? 

The RBA noted that globally monetary policy remains remarkably accommodative.

This appears to suggest that the RBA may be of the view that monetary policy is too accommodative, and in this context it would seem that they support the move by the Federal Reserve to tighten policy in December. Equally it would suggest that they question the merit of the surprise move by the Bank of Japan to move to negative interest rates and the European central Bank to further reduce their already negative rates.

This returns to a familiar theme from the RBA that monetary policy alone in any country cannot be expected to solve all problems.

The risk is that these interest rate moves tend to support competitive devaluations between countries that are not justified by underlying conditions.

Structural reform, often far reaching, is required to address fundamental problems in a number of the key global economies.

What is the RBA’s outlook for the Australian economy and global economy in 2016?

As noted above the RBA was quite positive on the Australian economy, the only caveat to this outlook is the potential negative impact arising from equity market volatility. At this stage the RBA will monitor market developments and in turn the impact on the domestic economy.

The RBA suggest that the economy had a reasonable amount of momentum into the end of 2015 and they expect this momentum to follow through to the first quarter/half of 2016. In terms of global growth the RBA is concerned that conditions have deteriorated in emerging markets, together with a moderation of Chinese growth. However, this potential weakness is offset by improved growth during the second half of 2015 amongst developed economies.

What is ING Direct’s outlook for the Australian economy, the global economy and the Aussie dollar this year?

The domestic economy appears to be heading in the right direction, as the transition continues away from the mining sector. Importantly the weakness in the currency over the past two years appears to have a positive impact on the export sector, in particular in relation to tourism, education and food exports.

While the AUD could be lower, it will likely get to around mid-60s over the first half of 2016 and US monetary policy further tightening translates into a stronger USD and weaker AUD. The lasting impact of the equity market volatility on the Chinese economy will remain to be seen, and will progressively emerge over the March quarter. It should be remembered that the Chinese economy is moving to a consumer economy phase and production will naturally decrease in favour of higher value-add consumer related imports.  A proportion of these will come from developed economies and regional Asian economies.

The pick-up in business confidence in the Australia economy over the second half of 2015 suggests that the economy entered 2016 with reasonable momentum.

The RBA clearly has the capacity to cut the cash rate again in 2016, however, it will be a waiting game as further evidence of the progress of the economy will be assessed.