by Michael Witts

What were the reasons behind today's rate decision?


The RBA left the cash rate unchanged at its June meeting.

Basically the RBA is very much in the “steady as she goes” mode. They perceive that monetary policy is appropriately configured to foster sustainable growth and the most prudent course is likely to be a period of stability in interest rates.

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

The RBA sees the economy continuing in the transition from resources related growth to more broad based growth. In particular, the RBA sees that monetary policy remains accommodative, and there is little likelihood of a move in rates in either direction in the period ahead.

What are the main concerns?

The RBA has returned to a familiar theme in this month’s statement; the exchange rate. The exchange rate remains high by historical standards, particularly given the further decline in commodity prices. TA lower exchange rate would provide further stimulus to achieved more balanced growth.

Significant improvement in labour market conditions remain elusive, with unemployment to remain steady in the period ahead.

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

According to the RBA rates will be on hold for an extended period. While this is a valid base case, arguments can be made for rates to move either way, although such moves are the outcome of a series of events.

For example, the current slump in consumer sentiment and spending could seriously derail the economy, this could prompt the RBA to reconsider their position. The high exchange rate could support this course of action.

Alternatively, continued strength in housing prices and a strong growth outcome in China may prompt the RBA to look at rates early in the first quarter of 2015.

What is the RBA's view on the Aussie dollar, and the outlook for the dollar? Are they worried about it?

The RBA sees the AUD still being too high with scope for it to come off.

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

The RBA is reasonably optimistic that the global economy will continue to enjoy moderate growth in the period ahead. They believe that China will grow at around 7% in 2014, which is in line with expectations.

What is ING Direct's outlook for the economy?

The economy is potentially at a turning point, while on the outside everything appears to be progressing quite well, there are a number of potential negatives on the horizon. For example, consumer sentiment has slumped over the past month, this needs to recover to ensure that the broader economy remains on track.

The exchange rate remains stubbornly high and further strength will potentially adversely impact the activity across the economy.

On balance we believe the economy will successfully steer a course through these obstacles.