By Michael Witts

What was discussed at today’s RBA meeting? Were there any major differences compared with its last statement? Any major concerns?

The RBA again left the cash rate unchanged at 1.5%. This means the cash rate is unchanged over the past 12 months.

The statement itself is almost identical to the previous month’s. Clearly the RBA is content to sit on the sidelines as the various macro-prudential controls imposed by APRA work their way through the housing market. The RBA is expecting a gradual improvement in the Australian economy over the next few years as non-mining investment improves. Labour market conditions have improved and are expected to continue on a gradually improving path.

Momentum in the housing market appears to be slowing in response to the macro prudential controls. Investor activity is being increasingly priced out of the market. Auction clearance rates have also come back to around 70% from above 80% over the past two years.

Against this background, wages growth will be tepid and inflation will reflect a similar benign outlook.

The RBA has again called time on further cuts in offshore interest rates, echoing the comments from various central bank officials over the past couple of weeks.  

If and when the RBA moves to increase rates any such move will be very gradual and the peak in rates in this cycle will be somewhat lower than in previous cycles.

What is your view on the call that the RBA could raise the cash rate at least 8 times over the next two years?  Can we expect any rate rises/cuts in the next year?

I would suggest that such a call is not supported by the current outlook for the domestic or global economy. Our view is that any move in rates would be very gradual and hence drawn out. Current expectations are that the RBA may look to adjust rates in the first half of 2018, and as noted, then only gradually.

To put the comments about eight moves in context, there was most probably less than eight words changed in the July statement relative to the June statement.

What is ING Direct’s view on the Australian economy, and the Australian dollar?

We are inclined to be broadly aligned with the RBA on their view of the economy. If there is a point of difference, it is that we would see the economy growing slightly faster as the export phase of the resources comes fully and forcefully online.

There is scope for the AUD to move lower from current levels as the interest rate differential between AUD and offshore interest rates narrow; this suggests that there is scope for the AUD to move back towards 70 US cents.

The key indicator for the economy is employment levels. Given the high level of household debt, any weakness in the labour market has the potential to move swiftly through into the housing market.