By Michael Witts

What were the main reasons behind yesterday's rate decision?

The RBA opted to leave the cash rate unchanged at 2% at its July meeting.

Although the comments from the RBA were largely unchanged from last month, it appears that the RBA is gaining increasing confidence that the settings of the economy are just about right for this stage of the economic cycle. While the RBA is optimistic that inflation will remain low in the period ahead, and therefore provide scope for lower rates, they are prepared to keep rates steady and keep the additional ammunition in reserve.

The RBA suggests that the level of activity in the economy will remain slightly below trend. Rather than interest rates providing a further stimulus to fill this void, the RBA is looking to a still lower Australian dollar to boost activity across the economy.

Strong housing price increases in Sydney were highlighted by the RBA. Again they have stressed that the actions of APRA in regard to adjusting bank lending criteria for investors is still to flow through to market. As and when this occurs, the RBA suggests that investor activity in particular will no longer be the driving force. 

What is the RBA’s view on the falling Aussie dollar? What will a lower dollar mean for the economy?

The RBA believes that a lower dollar is both likely and necessary to achieve more broad-based growth. This view is driven by the decline and ongoing lowering of commodity prices. Further, the recent equity market volatility in China and the political/financial turmoil in Greece have both resulted in a stronger US dollar and weaker Australian dollar.

The key behind the RBA push for a lower Australian dollar is that the competitive position of the export sector improves and this aids in the strengthening of the non-interest rate sectors of the economy. Through the broadening of the growth footprint, the economy is stabilised and becomes more resilient to external factors. 

With recent events in Greece, what is the Reserve Bank’s view on Europe, and the global economy?

While Greece has gained all the headlines of late, the volatility of the Chinese equity markets is a greater concern.

Australia’s exposure to Greece is minimal in overall terms and virtually zero in relative terms when measured against China. Therefore a healthy and stable Chinese economy and financial markets is key to Australia’s outlook.

Regardless of how the Greek situation is resolved, the knock on effect on the Australia economy is minimal under all but the most extreme scenarios, therefore the growth picture for China and the US remains key for Australia’s outlook.

In this regard the outlook for the US economy remains solid, with increasing speculation that the Fed will announce a tightening of policy over the second half of the year. Notwithstanding the recent volatility in Chinese markets, that economy will continue to grow and contribute to export demand from Australia.

In summary the RBA is relatively optimistic regarding the outlook for the global economy, expecting the global economy to expand at a moderate pace over the rest of 2015 and into 2016.

And their view on the Australian economy? 

The RBA is confident in the forward view of the economy. They have indicated that, while growth over 2015 will be slightly below trend, looking into 2016 growth will be stronger, especially on the basis of stronger exports, particularly LNG exports. It appears that the RBA is laying the groundwork for an extended period of unchanged rates. Their view of inflation is that it will be very much within target over the next one to two years, suggesting that from an inflation viewpoint, at least there will not be a drive for changing the cash rate.

What is ING Direct’s view on Greece?

It would appear that from a Eurozone viewpoint, the major countries cannot afford for Greece to exit the euro. Equally there is a need for Greece to accept that tough austerity measures are required. In addition, following the recent IMF report which concluded that the current proposals are potentially too tough, there appears scope for perhaps some debt relief to be part of the final solution. It is clear Greece will be in a very difficult position for an extended period. In addition, trust between Greece and it European partners needs to be restored.

Has the Australian economy benefited from lower interest rates? What is the outlook for rates?

The housing and construction sectors, together with flow on industries, have benefitted significantly from the low rate environment over the past several years. It is inevitable that at the low absolute level of rates we must be getting close to the bottom of the cycle. While interest rates are generally likely to be on hold for an extended period, the risk to this expectation is that there may be one final rate cut.

However, such an outcome would be heavily influenced by two key factors; a convincing slowdown in the rate of growth in the housing market (Sydney in particular) and developments in the global economy.