By Michael Witts

What did the Reserve Bank say in yesterday’s meeting?

The RBA kept the cash rate unchanged at 1.75% following its meeting earlier yesterday.

The key point in the statement was that the RBA effectively indicated that it was just about done in terms of future rate decreases. In previous months the RBA has ended its comments with words to the effect of “subject to future data, the RBA retains the capacity to further ease monetary policy”, however these comments were missing in today’s statement.

The reasoning the RBA provided was that overall growth is continuing to be strongly positive and various sources of domestic demand, as well as exports, have been expanding at above trend levels.

In this regard the recent stronger GDP data, a sharp rise in consumer sentiment and strong labour market indicators all suggest that the economy has more than ample momentum. In particular the increased export volume phase of the resources boom is starting to more strongly reflect in the growth outcome. In this regard, LNG exports are the standout.

What has changed in this month’s statement changed compared with last month’s statement? What is the RBA’s view on the Budget?

As noted above, the absence of forward guidance suggesting the RBA has further capacity to cut rates suggests that the May decrease may be the last under the current Governor.

This absence reflects the stronger recent economic data that has been released. 

Can we expect another rate cut this year?

At this stage, it is difficult to suggest a scenario in which the RBA would feel it is necessary to cut the cash rate again in 2016.

The most likely scenario is that rates remain on hold for an extended period, during which the US Federal Reserve will increase US rates and provide scope for the AUD to ease from around 74 US cents.

What is the RBA’s view on inflation?

The current level of inflation is not a major concern for the RBA. They acknowledge it is low and expected to remain low, given modest growth and labour costs with minimal pressures in the system.

What is ING Direct’s view on the Australian economy, global economy and the Aussie dollar?

We share the RBA view in relation to both the domestic and global economies.

The domestic economy is performing overall quite strongly. While there maybe uneven growth between the export sector and more domestically focussed sectors, the overall economy is growing broadly in line with non-inflationary capacity constraints.

The global economy is providing positive stimulus to the Australian economy through export demand and higher commodity prices.

The RBA will be hoping that the US Federal Reserve shortly moves on US interest rates. The most recent payroll data was weaker than expected, prompting the Fed to delay their adjustment to US rates. Month-on-month economic numbers are difficult to clearly interpret, as a given month may be subject to one-off factors. This suggests there is considerable scope for the data to be revised in the following month.

The Fed may move early in the September quarter, which would provide scope for the USD to move higher, leading to a weaker AUD.

The RBA would like to see the AUD back below 72 US cents at least, and ideally closer or below 70 US cents.

As discussed, it is highly likely that AUD rates are on hold for an extended period with the next move, most probably higher, some stage in the first half of 2017.