What are the reasons behind today's rate decision?

This is a further instance of the inflation dividend providing scope for the RBA to provide additional stimulus to the domestic economy to underwrite the transition of the economy from resources sector activity to the broader economy.

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

The RBA is seeing the economy growing a bit below trend and continuing in this vein. This will be in an environment, in their eyes, of weaker labour market conditions and with inflation well in hand.

And the global economy?

The global economy, according to the RBA, is running at a bit below average with a reasonable prospect of a pick up next year.
While these are the RBA views, it appears that this is in contrast to the equity markets view of the world. Global equity markets are up 20% plus this year and the domestic ASX market is also performing strongly. Also, there is significant stimulus in the domestic economy already, the impact of past rate cuts, the deficit spending from the government and the impact of the 15% fall in the exchange rate.
All these factors combined suggest that the domestic economy may indeed be somewhat stronger than the RBA is currently figuring.

What effect have previous rate cuts had on the Australian economy? Do you think the RBA is concerned or happy with the effect cuts have had?

It is always difficult to get a precise reading on the current state of the economy. Various official statistics are released with a considerable lag. Survey information is often a better guide.
The recent ING Direct wellbeing index provided a very good read on the current state of the economy. Mortgage holders were very comfortable with their position, as are people with credit card debts. Not unsurprisingly investors, potentially dependent on fixed income returns are concerned. This suggest that past rates moves are having the desired effects.
One concerning element that came out of the survey was the increase in the cost of living over the a past 12 months. In particular, respondents cited higher utility, grocery and fuel charges. This suggest that perceived inflation maybe running ahead of the official measure of inflation. In this regard the decline in the exchange rate will feed into the domestic price channels.

The Australian dollar has fallen significantly in recent times. Can we expect further falls?

The AUD appears to have got to a level that will provide considerable stimulus to the domestic economy and we think, that in a global context, current levels are about right. Further if, as suggested, by the RBA we are perhaps at the end of the easing cycle and the global economy surprises on the upside suggest the AUD could remain around current levels.

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

Our view is that the economy is more resilient than current economic data suggests, the previous rate cuts have built significant momentum in the housing sector, through both activity and price movements. The concern is that the inflation outlook may deteriorate quite quickly as imported inflation starts to feed into domestic price pressures.
We perceive that the global economy will prove to be an important source of growth for the Australian economy. Over the period ahead there will be a coming together of the growth expectations as reflected in global equity markets and forecasts for the Australian economy.

Michael Witts