What were the main reasons behind the RBA's rate decision today?

The RBA left the cash rate unchanged at its meeting today. The Bank cited the ongoing flow on effects from the rate cuts over the second half of last year, as providing momentum for other sectors of the economy to progressively take over as mining investment activity declines to more normal levels. These improving domestic fundamentals together with broadly positive trends in international markets meant that the Board was comfortable to sit tight for the present.
As the Bank noted, “The inflation outlook affords the scope to ease further should that be necessary to support the economy in the event domestic demand weakens.”

What effect did global issues such as Cyprus and the impact it may have on Europe have on the rate decision?

The Bank largely looked through the recent events in Europe. The Bank noted that while Europe remained in recession, growth in both China and the US remained moderately positive. The Bank acknowledged that re-establishing sustainable paths for both public and private sector finances in a number of countries, largely European, remains challenging. As a result, global financial markets remain vulnerable to setbacks arising from specific factors.

What are the local economic indicators is the RBA watching?

The Bank, for the past several months, has been focussing on the speed and breadth of the flow on effects of previous rate cuts through the economy. While the timing of these effects is likely to be drawn out, it appears that the early stages of the transition from an investment led economy to a more balanced growth profile is starting to emerge. The Bank cited the improvement in consumer sentiment and housing, as examples. More broadly, consumer sentiment has increased over recent months as the uncertainty surrounding Europe has receded, and the domestic factors turn positive.

What is the RBA's view on the Australian economy, and its outlook?

The Bank is reasonably confident on the status of the economy. The challenge for the Bank is getting the timing right. As the economy transitions, there may be a need for further monetary stimulus, however, the lagged impact of interest rate changes makes it difficult to get the outcome correct with precision. The Bank acknowledges this, when they commented, “The Board will continue to assess the outlook and adjust policy as needed (up or down, our emphasis) to foster sustainable growth in demand and inflation outcomes consistent with the target over time.”

What are the challenges right now for the Australian economy?

The challenge for the Bank is to manage the transition to more broad based growth across multiple sectors of the economy, from the current domination of mining related investment spending. In this regard housing and consumer spending will play key roles.