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CORRECT: RBA Paper Estimates Neutral Rate at 1%

--Correcting to Clarify Neutral Rate at 1%, Not Neutral Nominal Cash Rate
--Housing Market 'Particularly Important' For RBA Policy Transmission
--Lower Cash Rate Tends to Lower AUD, But Effect Small
By Sophia Rodrigues
     SYDNEY (MNI) - Australia's neutral interest rate has fallen by around 150
basis points since 2007 to about 1% now, with most of the decline due to a fall
in potential output growth, heightened risk aversion and a widening in spreads,
a paper published by the Reserve Bank of Australia said.
     The paper estimates the range of the neutral rate to be very narrow,
between 0.5% and 1.5%. Based on inflation expectations being well anchored at
2.5%, it equates to neutral nominal cash rate of 3.5% compared with current cash
rate of 1.5%.
     The paper is one of nine articles in the RBA's quarterly bulletin published
     This paper was likely discussed in the RBA's July board meeting and that
discussion was included in the minutes published that month. The discussion of
the neutral interest rate in the meeting led to speculation that the RBA has
begun thinking of monetary policy normalization but this was dismissed by senior
officials in their speeches and comments later.
     In the early 1990s the neutral cash rate was estimated at 3%, so the fall
since then is around 200 basis points, with 50 basis points of that decline due
to fall in potential output growth.
     According to paper, changes in spreads should have a one-for-one effect on
the neutral interest rate and in Australia the spread between market interest
rates and the cash rate have widened by 100 basis points or more.
     "Most of the increase in risk aversion and widening in spreads occurred
around the time of the global financial crisis. These developments are therefore
the most plausible explanation for the large fall in the neutral interest rate
that occurred at this time," the paper said.
     The size of the estimated fall in Australia's neutral interest rate is
similar to that of Canada and the United Kingdom, but smaller than the estimated
declines in the United States and the euro area, the paper said. However, given
the uncertainty inherent in these estimates, the paper's authors cautioned
against reading too much into this divergence.
     A separate RBA paper discussed how monetary policy transmission works in
Australia -- the stages of transmission and the channels through which it
     "The effects of monetary policy are hard to quantify, though the housing
market seems particularly important to the transmission process in Australia,"
the paper said.
     A lower cash rate stimulates household spending and housing investment,
partly through increasing the wealth and cash flow of households, the paper
     A lower cash rate also tends to result in a depreciation of the exchange
rate, the paper said, but added that the effect of interest rates on the
exchange rate is relatively small. An unexpected 25 basis point decrease in the
cash rate is estimated to lead to a 0.25% to 0.5% depreciation of the exchange
rate, it said.
     A third paper discussed how conditions facing the resources sector appear
to be stabilizing following the adjustment after the boom.
     The paper said that employment in the resources and resources-exposed
sectors is stabilizing, and that further gains in productivity are difficult to
achieve in the short term. 
     "However, there is likely to be downward pressure on employment in the
resources sector over the longer term from the automation of mining machinery
and equipment," it said.
     The paper noted in particular that completion of the remaining liquefied
natural gas (LNG) projects is not expected to add much to employment because
they require significantly fewer operational employees than iron ore and coal
     Estimates based on company reports and liaison suggest that combined
operational employment at LNG projects will stabilize at a few thousand people,
compared with tens of thousands involved in iron ore and coal operations, the
paper said. 
     "Over the long term, the experience of the mature LNG projects suggests
that the new LNG projects are likely to be able to expand production through
process improvements without increasing employment," it said.
     Another paper discussed the rising share of part-time employment in the
economy and its importance in assessing wage and price pressures in the economy.
     The paper noted that while the majority of part-time workers appear to be
working part-time hours voluntarily, there is a pool of part-time workers who
want to, and can, work additional hours. 
     "These workers represent additional spare capacity in the labor market that
should be considered when assessing wage and price pressures in the economy,"
the paper said.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email:
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]

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