by Michael Witts

What were the reasons behind today's rate decision?

The RBA has left the cash rate unchanged at 2.50%, with every likelihood it will be well into 2015 before rates will be changed.

It is very much more of the same but with even less words and minimal changes from the more recent statements from the RBA.

The RBA expects growth to be a little below trend for the next several quarters, the labour market has spare capacity, inflation is well behaved and the exchange rate is too high. Therefore rates are likely to be on hold for an extended period.

When is the RBA likely to adjust the cash rate?

The RBA appears to be in no rush to alter the level of interest rates anytime soon. The transition in the economy will not happen overnight and is very much a work in progress, therefore the RBA is willing and able to provide the necessary monetary stimulus. Although pleased with the stronger growth in the housing sector, the RBA and regulators have expressed concerns as to the high level of investors in the market and the crowding out of first home buyers.

The key to the timing of any move by the RBA is the action of the US Federal Reserve (US Fed). Now that they have ended their bond buying program, focus will turn to the timing of the commencement of returning US interest rates to more normalised levels. Recent economic data out of the US continues to be impressive with very strong growth over the past six months. Against this background it is likely the US Fed will start talking about the need to adjust rates over the northern hemisphere winter, with an actual adjustment late in the first quarter/early second quarter of 2015.

This will likely see the USD strengthen and provide scope for a lower AUD which in turn will provide the opportunity for the RBA to adjust the Australian cash rate higher. In a nutshell, we may see an adjustment to the cash rate in second quarter 2015. 

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

The RBA views the AUD as overvalued given the decline in commodity prices in recent months. As a result the currency is providing less support than would normally be the case to achieve balanced growth in the economy.

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

The RBA is comfortable with the position of the Australian economy going into the end of 2015. They are watchful of the fall-off in investment spending, although this is countered via higher export volumes and proceeds. Although the Chinese economy may be slowing slightly, the significant expansion in that economy over the past 10 years means there is significant stimulus contributing to aggregate demand.

The labour market is an area of concern in that despite strong employment growth over several years, there is still excess capacity.

As noted previously, the RBA retains the view that the AUD is overvalued.

The RBA believes the global economy continues to expand at a moderate pace.  Although not explicitly stated, they are likely to be concerned at the slowdown in the German economy and the outlook for Germany.

What is ING DIRECT’s outlook for the Australian economy and the Australian dollar?

At ING DIRECT we believe the economy continues to deliver on the transition path that has been underway for some time. Consumers appear increasingly comfortable with the economy and job market, notwithstanding the RBA‘s comments regarding surplus capacity.  This was captured earlier today with the release of the September quarter retails sales data at 1.0% compared to a forecast of 0.5%. This strong retail consumer spending outcome will underpin the September quarter GDP that will be released in early December.

The demand for home loans continues at a solid pace and will support growth in related sectors into the first quarter of next year.

While the AUD has decreased in the past few weeks it has shown very strong resilience in the face of lower commodity prices and there appears little on the horizon that is likely to break this resilience in the near-term.

The ING DIRECT view is that the RBA will be on hold until the second quarter 2015, and this will see the start of a gradual drawn-out return of interest rates to more normalised levels, however the peak in rate is expected to be somewhat lower than previously.