By Michael Witts

What was discussed at yesterday's RBA meeting? Were there any major differences compared with last month’s statement?

At yesterday’s meeting, the RBA left the cash rate unchanged at the record low of 1.5%. The comments this month were broadly consistent with the comments released following previous meetings. It would appear clear that the Bank is not inclined to further cut the cash rate. Equally, it appears unlikely that the cash rate will not be increasing in the near future.

The RBA noted that the recent moves by regulators through banks has seen the level of activity in the housing market, especially amongst investors, being to gain traction, although more concrete evidence is required before the RBA and other regulators are confident the market is fully responding to these initiatives.

Is the RBA still upbeat about the global and Australian outlook?

Generally yes. While the RBA does not comment on geo-political factors, the heightened tensions surrounding North Korea have the potential to stabilise growth in the region and potentially more broadly.

Putting this potential hotspot to the side, the RBA is increasingly optimistic regarding global and domestic growth, with improved labour market conditions more broadly together with the emergence of rising inflation.

The RBA retains the view that additional further monetary easing is off the table in major economies.

The RBA suggests that the domestic economy is expected to grow by around 3% per annum over the next couple of years.

What were the main concerns?

The three main areas of concern for the RBA continue to be:

  • The slow rate of growth of non-mining investment; “a stronger pick up would be welcome”
  • An appreciating exchange rate would complicate the outlook for the domestic economy, following a period in which the lower exchange rate has assisted the transition process
  • The absolute level and the rate of growth of household indebtedness, driven by higher house prices and slower/lower wage growth.

Did the RBA comment on house prices, particularly in Sydney and Melbourne? Are they concerned?

Again, the RBA noted that the housing market continues to vary considerably between states; prices have been rising briskly in some markets and declining in others.

The RBA continues to see considerable oversupply of apartments. As noted above, the pace of growth of debt in the household sector is a significant concern, although the RBA believes the recent regulatory measures should help address this concern. Time will tell.

What is ING Direct’s view on the economy, Australian dollar and interest rates?

The AUD recently settled around 75 cents. As noted by the RBA, a lower exchange rate would be more helpful for the domestic economy. This will likely require a combination of a stronger USD and lower commodity prices; a potentially unlikely combination in the current market.

It appears highly likely the RBA will be on hold over the course of 2017 and into 2018. Despite this, it is possible there could be further regulatory induced, out-of-cycle interest rate changes similar to what has been recently observed in the market. There is scope of further price differentiation between owner occupiers and investors and equally between interest-only and principal and interest loans.

The Australian economy appears on a positive path; solid employment, slightly rising inflation and steady interest rates augur well for the future direction of the economy.

The various budget measures that will be formally announced next week appear to have sufficient clarity and direction to minimise the risk of Australia’s AAA rating being downgraded.