By Michael Witts

What were the key points in today’s RBA statement?

The RBA was, if anything, slightly more optimistic at today’s meeting. In particular the bank highlighted that business surveys suggest a gradual improvement in conditions over the past year. In addition, consumer sentiment data was stronger again in this morning’s release.

The RBA did not appear to be overly concerned about comparatively low inflation. Equally it does not appear to be concerned about the recent increase in some home lending rates, noting that the pace of growth has moderated over recent months.

While the RBA kept rates unchanged in light of a slight firming in conditions over recent months, policy remains accommodative. The RBA commented that the inflation outlook provides scope for a further easing in policy should the need arise.
What is the RBA’s view on the Australian economy and the global economy? How does ING Direct see the Australian economy and the global economy?     

As noted above the RBA is generally comfortable with both the outlook for the global and domestic economies. The key point from today’s meeting is that the RBA is seeing a gradual improvement in the economy, which is largely as they expected as the transition from the resources sector to a broader base gathers momentum.

The fall in the exchange rate by about 20 per cent over the past 12 months is clearly aiding in this transmission process.

The RBA appears to signal that the pace of growth in housing prices has just about run its course and there has been evidence that this pace of growth has moderated over recent months. In addition, the RBA has noted that recent action by APRA is helping to contain risks that may arise in the housing sector.
What is their view on the banks raising interest rates?

The RBA has largely played down the impact of any increases in rates over recent weeks. The increase in rates does not detract from the fact that monetary policy and interest rates generally continue to be accommodative.

In some ways the RBA would be pleased with recent increases as it takes some of the heat out of the property market, while not increasing the cost of funding for businesses.

The RBA has suggested that, at current levels, the impact of changes in interest rates is very much at the margin in terms of the impact on growth. This is consistent with the RBA view that monetary policy and interest rates are not the only policy lever available. The RBA has argued in the past that other policy alternatives need to be advanced. In this context, the renewed focus on infrastructure is an example.
Are they happy with the level of the Australia dollar? What is ING Direct’s view on the Australian dollar?

While the terms of trade have fallen, the AUD has now moved to be in a range around 70 cents, currently at 72 cents; the RBA would be pleased if the AUD continued in this adjustment process. Any frustration for the RBA would come from the fact that in a near zero global interest rate environment the AUD still remains attractive to international investors.

It appears likely the US Federal Reserve will increase their interest rates before year end, which could put pressure on the AUD.

It would appear likely that the AUD may well drift slightly lower over the period ahead, to develop an anchor point somewhat below 70 cents.

What is the outlook for the cash rate now?

The outlook for the cash rate is largely unchanged as a result of today’s statement.

The RBA certainly has the capacity, via the low inflation rate and outlook, to further lower the cash rate if that is seen to be necessary.

At this stage the economy appears to be tracking slightly better than the RBA had previously anticipated. In addition, economic activity and growth in 2016 are shaping to be somewhat stronger than in 2015. One of the primary drivers will be the stronger export earning as a number of significant mining projects enter the production phase. In addition the global economy is slowly beginning to look marginally more positive, clearly lead by the US economy.

The market got slightly ahead of itself in the lead up to the RBA decision today. Consequently interest rates have moved about 5/8 basis points higher.