By ING Direct's Deputy Treasurer, Peter Casey

My take is that the RBA is really holding out for a lower AUD. Cutting the cash rate has not done much on this front as the AUD is modestly higher than where it sat prior to the May cut.

The main focus over the rest of the year will be on the US and whether the Fed raises the cash rate there.

If the Fed does not hike, then the RBA may well look to cut again early next year. The RBA is mindful that this could put some more fuel on house prices in Australia.

What were the main points of discussion at today’s meeting?

The key points were:

  • The global economy is growing at a below-average pace. In particular, Chinese growth is moderating.
  • Commodity prices have recovered modestly from the sell-off in the past couple of years.
  • The Australian economy is still growing, but with low inflation, there is capacity for faster growth.

Has last month’s rate cut had any effect yet?

  • It is too soon to gauge the impact on most measures. The Consumer Confidence number rose slightly, but it usually takes a while for this to translate into activity measures such as Retail Sales.
  • The AUD is actually slightly higher than when the RBA cut the Cash Rate last month, which would be a concern.

Can we expect a rate cut (or rise) this year?

  • We think the RBA is on hold until at least May next year, but if inflation stays low, then the RBA may look to cut again sooner. However, we think that the RBA would prefer to wait until the most recent rate cuts have had a chance to take hold.
  • Also, if the Fed does hike later this year, then the AUD may come under some downward pressure, which will help the domestic economy.

What is the RBA’s view on the Australian economy? 

The RBA’s view is that:

  • Economic growth will continue as the economy transitions away from the mining investment boom.
  • Employment is likely to keep growing in the near term but wages growth is weak.
  • Inflation is still low, helped by real wage growth and low cost pressures globally.
  • GDP numbers are out today, with expectations that growth will be running just over 3%.
  • If GDP is weaker than expected and if CPI remains below 2%, then pressure may build for the RBA to cut rates sooner than expected.

What is the RBA’s view on the global economy and the Aussie dollar? Is this different to ING Direct’s view?

The RBA sees modest growth from the global economy, notwithstanding some bright spots. Importantly for Australia, the RBA mentioned that growth in China is moderating.

  • We agree with the RBA’s comments that low-cost pressures from offshore are helping to keep inflation low. This may prompt the RBA to consider cutting the Cash Rate again, but we think that on balance they will keep it steady for the medium term.
  • The RBA remains concerned about the AUD remaining stubbornly high – it complicates the current economic transition. 
  • The most likely prompt for a lower AUD is a hike by the Fed this year. The RBA would probably prefer this to having to cut the local Cash Rate again.