By Michael Witts

What did the Reserve Bank of Australia (RBA) say in today’s meeting?

The RBA lowered the cash rate by 25bps to an historic low of 1.75% at its meeting earlier today. The Bank cited the sharp decrease in the measured inflation rate as reflected in the recent March quarter CPI.

The RBA suggested that overall inflationary pressures are lower than previously expected.

The RBA was also optimistic that the decrease in the cash rate would not fuel further price acceleration in the housing market, as the measure introduced by APRA (Australian Prudential Regulation Authority) on banks have been effective and the risks are less than a year ago.

In regard to the inflation outlook it should be noted that the low March quarter CPI print was driven by a couple of one-off factors, namely lower fuel prices due to lower oil prices and lower international travel costs, which is a combination of both lower oil prices and a higher Australian dollar. These factors could turn around in the near-term.

Despite this aspect, the RBA would also be looking to see lower interest rates supporting a lower Australian dollar.

Has anything in this month’s statement changed compared with last month’s statement?

The major change over the past month has clearly been the lower CPI print and to a lesser extent the increasing frustration with the AUD that it has drifted towards to the high 70s level rather than back towards and or below 70 cents. In addition a recent speech by the governor of the RBA stressed that monetary policy alone cannot solve all of the issues. Those comments have added significance given the proximity to the federal budget. The RBA would be looking towards Fiscal policy providing greater support to the broader economy, rather than purely relying on monetary policy. 

Does ING Direct expect a rate cut this year?

The RBA would be reluctant to further adjust the cash rate in the medium-term until they have a clearer reading of the inflation picture. Equally, the impact of the federal budget on the broader economy will need to be assessed. This suggests rates will be on hold well into the second half of the year.

What is the RBA’s view on the Australian economy, global economy and the Aussie dollar?

The RBA view on the economy is largely unchanged from earlier in the year. As noted, the lower inflationary environment is the key issue for the RBA in a domestic context. The concern that the RBA is attempting to mitigate is the deflationary spiral that has impacted the global economy.

The RBA is reasonably positive about the global economy, in that there are ongoing signs that the global economy continues to head in the right direction.

The RBA has suggested that the recent uptick in the AUD will complicate the outlook for the domestic economy, therefore in cutting the cash rate they are hopeful that the AUD will reverse the recent movement.

In broad terms, we would agree with the RBA view of the economy. Clearly the economy remains in transition from mining to more broad-based growth, and the services and associated sectors are underpinning growth in the broader economy.