What were the main reasons behind the RBA's rate decision today?

The RBA left the cash rate unchanged at 3 per cent today. The bank cited the combination of the following factors as contributing to their decision:

  • Improving global sentiment
  • Leading to stronger equity markets, while commodity prices remain at reasonably high levels.
  • The domestic market appears to be beginning to respond to prior cuts in interests rates over the second half of last year; and
  • Dwelling investment is slowly starting to pick up.

 
 

What effect did global issues (US, China and Europe) have on the rate decision?

The Bank noted that the previous clouds that had dominated international financial markets over the past year or two, have started to lift. The US is expanding, financial strains in Europe have significantly improved, China continues to experience robust growth and broader Asian growth has stabilised. These elements have all contributed to an improved global picture, which will provide support for the Australian economy via resource related demand.
 
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What is the RBA keeping an eye on in regard to local economic indicators and global issues?

The RBA has stated on several occasions that the peak in the investment phase of the resources boom is approaching, as this occurs there will be scope for some other areas of demand to strengthen. The interest rate decreases from last year were designed to support those sectors of the economy. The inflation outlook provides scope for the Bank to further adjust rates if additional stimulus is required.
 


The RBA will be monitoring growth in the demand for credit, currently it is lower than the RBA would prefer.
 


The Bank also acknowledged that financial markets will continue to be subject to occasional setbacks in the recovery process. 
 
 


What is ING Direct's prediction for further rate cuts/rises over the this year?

The global and domestic economy have entered 2013 with a significant improvement in both business and consumer confidence. Against this background, it is acknowledged that the RBA is nearing the end of the current interest rate cycle. As noted by the Bank the inflation outlook provides the Bank with scope to further adjust rates should the need arise. In the absence of volatility, it is reasonable to expect the RBA to be on hold for an extended period, although it is possible they may provide a final interest rate cut in the June quarter.



What is your outlook for the Australian economy?

As noted above the flow on effects of past interest rate reductions are starting to filter into the domestic economy. This together with the improved global outlook suggest that  the outlook for the Australian economy is sound. The challenge for the economy will be in the transition from an economy fuelled by investment spending to a more broad based economy with activity levels in the non resource sectors responding to the interest rate cuts. The measure of success of this will be in labour market data and in particular the composition of employment growth between full time and part time employment.


What is ING Direct's outlook for the Australian dollar?

The AUD has traded within a comparatively narrow range over the past several months broadly 1.02/1.05.
 
With interest rates on hold, potentially for an extended period, there remains a strong interest rate differential in favour of the AUD. This differential together with the improved global outlook, suggests that the AUD will continue to be well supported in the period ahead.