By Michael Witts

What were the key points in today’s RBA statement?
 
The statement from the RBA, following their decision to leave rates unchanged, was very much in line with comments following recent monthly meetings.
 
Global growth was OK, led by the US, although China and Asia are potentially slightly weaker. Against this background the US is likely to move to increase rates in the near term.
 
Domestically growth in the Australian economy is expected to be slightly below trend. This will be confirmed today with the release of the June Quarter GDP data. Expectations are for quarterly growth of 0.4% and annual growth of 2.4%. The RBA noted that labour markets have held up reasonably well over the past year; however this suggest that productivity has suffered over the same period.
 
The comments from the RBA are consistent with their earlier observations and it suggest it is not overly concerned about the recent equity market volatility.
 
Last month the RBA was quiet on China – has this changed?
 
The Bank mentioned China in the text, however, it did not highlight Chinese market equity as a key risk to the Australian economy. The Bank has previously noted that in the transformation of the Chinese financial system things can go smoothly but at other times less so. This is perhaps one of those latter periods. The key point is that the Chinese authorities have the capacity, resolve and resources to stay the distance.
 
What is the RBA’s view on the Australian economy?

 
The RBA suggests that the economy has current spare capacity and that this will remain in place for a period of time. Against this background the inflation risk from the economy stepping up a gear is limited, hence it appears likely the RBA is on hold regarding interest rates for a considerable period.
 
Instead, the RBA would like to see the continuation of the recent weakening trend of the Australian dollar, as this would provide scope for more broad-based growth without breaching capacity constraints and hence inflation.
 
Does the RBA want to see the Australian dollar any lower? What is ING Direct’s view on the Australian dollar?
 
The RBA has stated firmly on several occasions over the past two years that the currency is likely to move lower on the back of the weaker terms of trade. In the eyes of the RBA and ourselves, there is a strong case to suggest that the Australian dollar may move lower. The counter to this argument is that the $A is now driven by factors beyond a pure terms of trade debate. In the past, the recent volatility in Chinese equity markets would have seen the $A sharply lower, however the $A has remained relatively steady, although lower over the past four weeks.
 
What is ING Direct’s view on the Australian economy and the global economy?
 
The Australian economy will continue to deliver solid, if not spectacular, growth over the balance of 2015. Into 2016, the flow-on effect of higher export volumes will become apparent, as will strong global growth and the benefits of a lower $A.
 
The flow-on effects of the solid level of activity in the construction and housing sectors will remain evident for some time yet. Equally the contribution from infrastructure spending will underwrite solid growth in the period ahead.
 
What is the outlook for the cash rate?
 
The cash rate will be on hold well into 2016, and potentially 2017.
 
The risk to this view is continued Chinese equity market volatility beginning to have an impact on the real economy resulting in a sharper than expected slowdown in demand from China. The Chinese authorities have a number of policy tools available to manage the economy on many fronts.
 
The RBA may contemplate a further cut in the cash rate if they thought the Chinese economy was slowing too quickly, and in an uncontrolled manner. The pre-requisite for this is a meaningful slowdown in the Sydney property market, which appears some way in the future.