by Michael Witts

What were the reasons behind today's rate decision?
The RBA kept rates unchanged at its meeting today. The RBA appears reasonably comfortable with the current state of the Australian economy and importantly in the likely future direction of the economy. The bank commented that monetary policy is appropriately configured to foster sustainable growth in demand and  an inflation outcome consistent with the target.

What is the RBA's reading on the Australian economy?

As noted the RBA is happy with the domestic economy, in particular they note consumer spending is increasing and there is considerable momentum in the housing sector, which has built up following the flow on effects of past interest rate cuts  and the generally low level of interest rates. The volume and value effects of increased resource related exports is flowing through; this is expected to become a key source of growth in the years ahead.

Investment spending is highlighted as a weak sector, but this is to be expected given that investment spending is returning gradually to more normal levels.

What are the main concerns?

The Bank highlights the weak labour market as its primary concern. In addition the high profile job losses that have been announced over the past few months will be adding to the concern at the RBA regarding the state of the labour market.

The Bank again indicated that domestic sources of inflation remain a potential area of concern. They appear to almost hope that the inflation picture will be OK , without any strong conviction that it will be. This tends to support the contention that if inflation remains elevated, and a lower currency adds more price pressures, the RBA will be quick to adjust rates to reverse these trends.

What is the RBA's view on the global economy?

The Bank appears to have become more confident on their global view, noting that Europe, Japan and China are all on growth paths. The recovery in the US is expected to gain renewed momentum once the adverse winter weather conditions clear. The Bank has looked through the current issues in the Ukraine, although it did note that conditions in some emerging markets remain challenging.

What are the RBA's main concerns with the global economy?

The RBA is very comfortable with the outlook for the global economy. This outlook combined with and contributing to the positive outlook for the Australian economy again adds to the likelihood the RBA will respond to the first signs that inflation has the potential to breach the upper end of the RBA target range (3%).

What is ING Direct's outlook for interest rates and the economy?

At ING Direct we believe the RBA will be on hold until the second half of the year. Our view is that the outlook for the domestic economy into 2015/2016 is very positive, in addition the global economy appears to be heading for a period of solid growth following the lack lustre performance over recent years. The combination of these factors will likely see the RBA look to increase the cash rate in the December quarter, as a first step towards returning the domestic interest rate curve towards more normalised levels.