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On the RBA rates decision

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Published on: Wednesday, August 05, 2015

Michael Witts, head of treasury at ING Direct, shares his insights on yesterday's decision by the RBA to leave interest rates on hold at 2%.

What were the main reasons behind the rate decision?

The RBA kept the cash rate unchanged at 2% following its August meeting. The RBA suggested that monetary policy needs to be accommodative and confirmed that their current approach to monetary policy fits this bill.

The key call out this month from the RBA is that after several months when the currency was seemingly blocked above 75 cents, it has started to respond to the combination of lower commodity prices and heightened risk surrounding the growth outlook for China.

Again the RBA commented on the continued rise in Sydney house prices, emphasising that they are working with regulators to manage the risks that may arise in this sector. In this regard, the RBA would be pleased to see various measures that have been announced by banks to differentially price loans to owner occupiers versus investors.

What impact is talk of the Fed thinking about raising rates in the US having?

This potential move by the FED has been well broadcast over an extended period of time and it will come as no surprise when it actually translates into higher US rates. In this regard, this potential rate increase is largely already priced into the market. While an actual announcement could generate some market volatility, this will likely be very short term

What is the RBA’s view on China?

The RBA was quiet on China, and for that matter Greece, apart from a passing acknowledgement that markets in both these countries had experienced increased volatility in recent months.

It is still too early to be sure what the final impact on China will be. It is clear the authorities still have a number of policy tools available to fine tune the various sectors of the economy, and have indicated a willingness to use these measures to achieve their growth objectives.

Currently China is growing at around 7% per annum, and even if the economy slows slightly the absolute size of the Chinese economy is significantly larger that say five years ago. Therefore even below 7% growth is still impressive.

And their view on the Australian economy?

The RBA appears reasonably comfortable with the current state of the Australian economy. Labour markets have been slightly stronger than previously anticipated, however despite this the economy is displaying that it is operating with slight excess capacity. Against this background inflation pressures remain well in check, despite the potential imported inflation impact arising from a lower AUD.

It appears increasingly likely that the RBA may be at the end of their easing cycle as the economy appears to be gathering momentum. The lower Australian dollar is feeding through to non-mining related sectors of the economy, eg. tourism and services, and retail trade data published on Tuesday was slightly above market expectations. This in part reflects the flow-on impact of housing related expenditure.

What is their view on the lower Aussie dollar? What is ING Direct’s view on this?

The RBA is happy to see the AUD lower and appears to have an expectation that it will drift lower still. A potential appreciation of the USD following any tightening of US interest rates could accelerate the decline in the AUD.

The RBA has focussed on the decrease in the terms of trade over recent years. A broader dynamic has come into play with the reserve asset status of the AUD increasingly acting to counter any currency direction driven purely by trade flows.

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

ING DIRECT’s view, on both the global and Australian economy, is consistent with the RBA. The economy is moving through the transition from mining investment to more broad based growth. In addition, the export phase of the resources boom will continue to ramp up further into 2016, which will underwrite growth.

Has there been any change to the RBA’s outlook for interest rates?

Broadly no.  The RBA retains the capacity and the ability to adjust rates as and when they see fit.  At this time they are prepared to sit on the side lines and let their past actions work through the system.

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