MNI ANALYSIS: RBA AUD Comments Key Downside Risk for Cash Rate

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia left the monetary policy

stance unchanged but has erred to the dovish side by pointing to the dampening

effect the higher Australian dollar could have on the economy and inflation.

     The statement is in line with MNI Insight published earlier this month that

the cash rate could move up or down, and the Australian dollar could be a key

determinant of its next move.

     "An appreciating exchange rate would be expected to result in a slower

pick-up in economic activity and inflation than currently forecast," was the key

line in the RBA statement Tuesday, where it left the cash rate unchanged at 1.5%

as widely expected.

     "The higher exchange rate is expected to contribute to subdued price

pressures in the economy. It is also weighing on the outlook for output and

employment," the RBA added. This combined with the earlier line, could be

described as one of the RBA's strongest jawboning comments in a cash rate

statement in a while.

     More dovish tones were visible in the slight downgrade in growth forecast

even though the RBA said the forecasts are largely unchanged. The RBA also made

it a point to remind that both headline and underlying measures of inflation are

running at a little under 2%.

     The RBA pointed to increased competition from new entrants in the retail

industry as a source of downward pressure on inflation - the first time it did

so in a cash rate statement. The offset would come from higher prices for

electricity and tobacco, the RBA said. 

     But the main dampening source would be higher Australian dollar - if

sustained -and that could make a case for cash rate cut, once the risks in the

housing market are contained.

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

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