by Michael Witts

What were the reasons behind today's rate decision?

The RBA kept the cash rate unchanged at 2.5% at its February meeting.

The Bank continued with the theme that past rate cuts were working their way through the economy. This in tandem with the lower Australian dollar are providing support for growth in the economy to become more broad based.

What is the RBA's reading on the Australian economy?

They are reasonably happy with the state of the economy. They acknowledge that the housing market and consumer spending are firmer, however business investment remains subdued.

The RBA expects growth to remain below trend for a time yet and unemployment to rise further. Beyond the short term growth is expected to strengthen, helped by continued low interest rates and a lower exchange rate.

What are the main concerns?

Conditions in emerging markets are challenging and contributing to market volatility. Labour market conditions are likely to remain weak for an extended period.

Inflation could emerge as a potential issue. The lower exchange rate is contributing to higher prices on traded goods, which while the exchange rate was strengthening had had a positive impact on overall inflation. Now domestic cost pressure are emerging suggesting the RBA will be watching this closely in the period ahead.

Is the RBA trying to encourage the Australian dollar lower? What is ING Direct's view on the Australian dollar?

In previous statements the RBA has been suggesting the exchange rate is overvalued, whereas today they stated “the exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy.”  This seems to suggest that they do not foresee a need for a still lower exchange rate but rather  consolidation of the AUD at around current lower levels. It is interesting to note that the AUD is about 100 points higher following the statement.

From an ING Direct viewpoint, we would still see merit in a lower currency as this will broaden the stimulus to the less interest rate sensitive sectors of the economy, while also enhancing the international competitiveness of the economy. This will not remove the need for increased productivity.

What is the RBA's view on the global economy? Did they mention QE tapering in the US?

The RBA is reasonably optimistic on the outlook for global growth “with reasonable prospects for a pick up this year” (in global growth). They do not perceive the current volatility in emerging markets as having a significant impact on global prospects.

They are impressed by the initial signs of improvement in the European economies, together with good growth in Japan.

What is ING Direct's outlook for interest rates and the economy in 2014?

Consistent with the RBA view, ING Direct believes that rates will be on hold for an extended period.

The risk to this outlook is that if the current emerging and equity markets volatility becomes entrenched or more widespread, this may result in a downward revision of domestic growth prospects.