by Michael Witts

What were the reasons behind today's rate decision? Is there any indication the RBA will increase or cut the cash rate in the future?

The RBA left the cash rate unchanged at 2.50 per cent, meaning the cash rate has been unchanged for the past 12 months.

The comments from the RBA Board following the meeting were almost unchanged from the previous month. This is largely because the broad picture of the economy, interest and exchange rates are unchanged from the previous month.

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

The RBA sees the Australian economy as continuing in the transition phase from the resources investment boom to more sustainable broad based growth. The Bank noted that there are tentative signs that business investment spending is starting to improve slightly from a low base.

Generally the RBA is very comfortable with the state of the economy. Although inflation ticked up during the June quarter, the Bank explained this away as being related to the lower value of the Australian dollar during summer.

The Bank appears more confident on the global outlook. Growth in the Chinese economy is on track and the US economy continues to deliver solid results.

What are the major concerns?

The main concerns are similar to previous months; namely unemployment is likely to stay around current levels for a while and the exchange rate is persistently high when measured by historical standards in light of the decline in commodity prices. The exchange rate needs to be lower for more broad based growth to be securely anchored.

What is the RBA's view on housing?

The RBA was fairly quiet regarding the housing market, their comments were more directed at housing prices with the Bank noting that the rate of increase has slowed somewhat over calendar 2014. The boost to housing construction activity is welcome as it is supporting the growth in consumer spending on related items.

What is the RBA's view on the Australian dollar?

The RBA is correct in its observation that the currency is high by historic standards, however, a meaningful decline in the currency will be a function of a tightening of liquidity condition in the US, as a pre-curser to a lift in the Federal funds rates. Neither of which is expected prior to the end of 2014.

What is ING DIRECT's outlook for the economy?

The RBA indicates that monetary policy remains accommodative and that a period of stability in interest rates is appropriate at this point in time. The Bank appears to have been relived that the rate of price increases in the housing sector is starting to steady/become slower. We would agree that any further acceleration of housing prices would have an adverse impact on the balance within the economy.

The labour market looks like being weak for a period of time. The reality is that although there may be jobs available, there is a time lag involved between finishing one job and starting the next. For example, layoffs happen in one announcement, however, each individual takes time to get their respective new position.

At ING Direct we do not expect the RBA to change the cash rate over the balance of 2014, and currently favour a move in the March quarter of 2015. The caveat to this is continued progress on inflation; if inflation continues at the upper boundary of the target range , the RBA may be forced to act earlier than expected and importantly ahead of weakness in the currency. In this scenario the AUD could continue to detract from supporting growth in the broader economy.