by Michael Witts

What were the reasons behind today's rate decision?

The RBA kept rates on hold. It is very much a case of more of the same, “rates are appropriate to foster sustainable growth in demand and inflation outcomes consistent with target, the most prudent course is likely to be a period of stability in interest rates.”

The RBA is happy with the state of the economy, although they acknowledge the price pressures on the property market.

The Exchange rate remains too high for the RBA, however, the strength of the property market prevents further action on interest rates to take steam out of the market.

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

In a nutshell the RBA believes that the domestic economy is reacting in textbook fashion to past rate cuts. Consumer spending is improving as disposable income increases, resulting from lower interest rates. Equally credit growth is starting to improve.

Domestic sources of inflation are likely to be contained which will act to mitigate the impact of potentially higher prices for imported items arising from a lower exchange rate.

What are the main concerns?

The Bank highlighted two main areas of concern

Dwelling prices have increased significantly over the past year, with little indication that this price pressure is likely to ease anytime soon.

The exchange rate remains high by historic standards. The RBA clearly wants to see a lower exchange rate. This can come about through many sources, the most likely of which is cracks starting to emerge in the China/Asian growth story. In this regard the RBA notes that growth in China has slowed a little over early 2014.

Could we see interest rates start rising in the near future or next year?

Predicting the timing of interest rate changes is always challenging. First up , it is clear that the next move in rates in up; our view is that the most likely timing is in November 2014. This is a function of ongoing growth in the economy, the response to the forthcoming Budget and global growth outlook.

Although unemployment to expected to rise slightly over the period ahead it is not expected to be an impediment to the RBA adjusting rates when they deem appropriate.

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

The RBA has retained their view that the global will progressively improve over the course of 2014, although the view on China has softened somewhat. It is interesting that various RBA Board members were in Hong Kong last week and during this visit have perhaps gained further insight into the future view of the Chinese economy.

This view on China, if translated to reality may assist in weakening the currency.

What is ING Direct's outlook for the economy?

The fundamentals of the economy have not significantly changed over the past 6 months. The broad foundation of the economy’s current path was the outcome of the past rate cuts. The key differential over the past 6 months has been the improvement in both business and consumer confidence.

The housing market is strong, interest rates remain at or near record low levels, loan arrears remain very well behaved and the majority of borrowers are well ahead of their scheduled repayments.

Global growth appears that it will continue to positively contribute to the Australian economy in the period ahead.

There appears to be increasing volatility in various monthly economic data, as a result too much should not be read into a single months outcome. The labour force data is a case in point. Following the very strong outcome for February it would not surprise if there was some give back over the next few months.

Our view is that the RBA will look to increase rates in the second half of 2014, most likely in November.

What are your main concerns?

Without doubt the key concern for the RBA are the dual issues of property prices and the level of the exchange rate. Both of these are largely beyond the direct control of the RBA.
The exchange rate will overtime adjust to the down turn in terms of trade, equally it could be expected to move lower as investment funds are redirected to the recovering global economies.
It could well be that a new dynamic is evolving in terms of the economy, interest rates and the currency. Traditional drivers are perhaps becoming less effective in the face of central banks holding an increasing proportion of reserve assets in AUD and off shore cash investors buying property. Both of these actions are largely insensitive to interest rates and as such given the potential impact on the overall economy and property prices are outside of the remit of monetary policy. The RBA has made this point on several occasions, all arms of public/government policy must act in a co-ordinated manner to achieve desired outcomes.