By Michael Witts 

What was discussed at today’s RBA meeting? What are the RBA’s main concerns?

The RBA left the cash rate unchanged following yesterday's Board meeting. This outcome was widely anticipated across financial markets. Current expectations are that the RBA will be on hold over the balance of 2017 and into the first half of 2018.

The RBA remains positive on the global economy and has called time on any further easing of monetary policy across the globe. In this environment, it is challenging to identify a scenario in which the RBA would ease the local cash rate.

The housing market received more than usual attention in the statement released after the meeting. The RBA highlighted their concerns around the growth of interest-only lending and the extent to which lending standards may be at risk of compromise given the demand for housing funding. The Bank again highlighted the patchy nature of the housing market, with most activity focused on the east coast and largely in Sydney and Melbourne.

However, even within these cities there are multiple markets operating at different speeds. The looming oversupply of apartments was highlighted, suggesting the RBA perceives i increasing settlement risks. The growth in household debt at a rate well above the growth in household income continues to be unsustainable over the long run, and has the potential to be of serious concern in the event of labour market weakness.

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

The RBA again re-iterated that a further strengthening of the AUD would complicate the transition process from mining investment towards non-mining sectors. The very strong trade surplus announced yesterday further highlights the combined benefits to the Australian economy of higher export volumes, as the next phase of the mining boom comes on stream ie. the production phase, combined with the turnaround in commodity prices evident since mid-last year.

This outcome will underwrite solid income across the economy in the period ahead. In regard to the exchange rate, longer-term movements are the relevant considerations rather than month-on-month movements. In this context, the AUD remains well below its average level from, say, three years ago.

Looking forward, given the high likelihood of the US Federal Reserve continuing to raise US interest rates, it is reasonable to expect the US dollar to strengthen resulting in the AUD moving below 75 cents towards 70 cents.

Has the RBA changed its view on property market in Australia? What is ING Direct’s view on property prices?

In relation to property prices, as previously noted, there is not a single property market in Australia, let alone within cities and or regions. The recent action by APRA and ASIC, after consultation with the RBA, means that in those markets driven by high levels of investor activity, bank loans for investment properties and interest-only loans will be more expensive. In effect, there will be an increasing gap between interest rates on owner-occupied loans and investor loans.

This is, in some way, a return to market conditions from say 20/25 years ago, when there was a clear differential between interest rates to these two types of borrowers. The regulators believe this will take some of the froth out of the market. Time will tell.

It appears likely that the upcoming Federal Budget will potentially include measures to decrease the attractiveness of housing investment. All of these measures are directed at the demand side of the equation, however, equal if not more focus should be applied to the supply side together with transport infrastructure.

What is ING Direct’s view on the economy?

Overall, the economy appears to be in reasonable shape with the prospect of continued broad-based growth in the period ahead. The immediate issue that needs to be addressed is how to take sufficient steam out of the housing market, while at the same balancing the competing forces such that prices can be stabilised without sharp negative moves in the event of a marked contraction in demand. This is especially the case given the looming over-supply of apartments, to which the RBA has referred to on a constant basis over recent months.