by Michael Witts

What were the reasons behind today's rate decision? 

The RBA left the cash rate unchanged at 2.5 per cent, following its monthly Board meeting. 

Despite expectations of a meaningful change in commentary, the RBA left their comments largely unchanged this month. From their viewpoint, accommodative monetary policy is still required for a further period to support growth in demand across the economy. This is especially the case given the slowdown in investment spending and, as yet, the increased capacity that this creates has not been taken up in other sectors of the economy. Overall, the RBA expects growth to be below trend for several quarters into the future.

Against this background the RBA repeated that there will be a period of stability ahead for interest rates.

Has anything changed in today's statement? Why?

Today’s statement was mostly unchanged from previous months.

The RBA noted that investors are directing funds from lower earning assets towards real estate assets which enjoy a similar or marginally higher gross yield together with the prospect of capital growth.

The RBA has acknowledged the decrease in the exchange rate over the past month, but again appears to be calling for it to be lower still, noting that it remains high by historical standards especially given the fall in key commodity prices over recent months. The RBA is looking for the lower currency to underpin broad-based growth across the economy

What is the RBA’s view on the Aussie dollar now?

The RBA expects to see the AUD lower.

Increasingly over recent months the currency has been less responsive to changes in commodity prices, in combination with low interest rates, therefore the RBA has reverted to talking the currency lower. Over the past month this has had an impact, although it is largely the result of a stronger USD which is benefitting from the ongoing strong economic performance of the US economy.

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

The RBA sees the Australian economy as currently experiencing moderate growth, although the outlook is for below trend growth in the near term.

While growth in the US economy has been strong, particularly in terms of jobs, the broader global economy is more patchy. Chinese growth is beginning to show signs of cracks; the property sector, previously one of the main drivers in the economy, has begun to react to the substantial oversupply of new properties. Growth in Europe is taking longer to respond to the extreme monetary stimulus that has been provided by the ECB.

What are the major concerns?

The RBA appears to have raised the rhetoric in relation to the AUD and its failure to respond to the fall in commodity prices.

A further potential area of concern for the RBA is the flow-on effect of the noticeable slowdown in wages. While positive for inflation, domestic demand may potentially suffer as consumers reduce spending. In this context, the RBA sees a lower exchange rate as providing a boost to demand.

What is ING Direct's outlook for the Australian economy and the Australian dollar?

The Australian economy continues to be finely balanced in terms of the transition in the economy. The volatility of labour force data over recent months means that interpreting the data is especially difficult, and in this context the RBA is rightfully cautious.

At ING DIRECT we would agree with the RBA that the AUD is over-valued, however the steep decline in the currency over the past few weeks may be overdone in the short term. Over the longer term it is clear that the currency will move lower, however, the path should be more gradual.