MNI ANALYSIS: Household Consumption Risk Means RBA Tad Dovish

By Sophia Rodrigues

     SYDNEY (MNI) - A more gloomy view on the outlook for household consumption

was the highlight of the minutes of the Reserve Bank of Australia's December

board meeting, meaning 2017 ended with a downside risk to its monetary policy.

     In the minutes, published Tuesday, the RBA for the first time described the

outlook for household consumption as a "significant risk" in what appeared to be

a deliberate, but subtle, shift in language to signal an important change in

view.

     As recently as the cash rate statement on Dec. 5, the RBA described

household consumption as a source of "uncertainty." Some variation in language

between the cash rate statement and the minutes is not uncommon simply because

the minutes give a more detailed account of the discussions at the meeting. 

     But sometimes, and in this case in particular, the variation is significant

because it signals the potential of changing the direction of monetary policy

from an on-hold-for-longer stance to the potential for further easing. The use

of the word "risk" indicates a directional shift, in this case downwards.

     The variation is more significant given the minutes had very positive tones

around growth and employment prospects for the local economy and for growth in

the global economy. But it is the characterization of household consumption that

matters most to the monetary policy outlook.

     The RBA noted that conditions in the global economy had improved over the

course of 2017 and that the outlook had been upgraded. In addition, the RBA said

recent domestic economic data had increased confidence that there would be

further progress on the jobless rate and on inflation. The RBA also noted that

the outlook for non-mining business investment had improved further and the

pick-up in public infrastructure investment was also supporting overall growth.

     But the key consideration for the monetary policy outlook is not strong

stronger growth or an improved labor market, but rather how those factors

translate into wage growth, an increase in household income and an acceleration

of overall inflation.

     The RBA's worry is that the stronger outlook for growth and the labor

market won't be sufficient to push up wage growth and thus income growth. 

     This creates a clear downside risk for household consumption, which, if it

pans out, will affect the RBA's growth and inflation forecasts.

     And if it indeed results in a downgrade to those forecasts, it would put a

rate easing back on the table. But any decision to ease would, as usual, be

dependent on what else is happening in the local economy, especially in the

housing market, with household balance sheets, and with the exchange rate.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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