MNI ANALYSIS:RBA: Dnside Risk Fm Possible Tighter Lending Stds

--Upside Risks From Global Inflation; Speed, Extent Of Wage Growth Pick-up

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia cited a further tightening in

lending standards as a new downside risk to its forecasts but a upside risk from

extent and speed of domestic wages growth and inflation pick-up, and from higher

than expected global inflation.

     At the same time, the RBA maintained its central view that the next move in

the cash rate is more likely be up than down.

     In the minutes of the May board meeting published Tuesday, the RBA clearly

flagged the risks to its central forecast for the economy to grow a little above

3% from late 2018, which would lead to a modest decline in the unemployment

rate, and to gradual increase in wages growth and inflation.

     Among the downside risks, the RBA said a further tightening in lending

standards, particularly in the context of the current high level of public

scrutiny of banks, was possible, which would affect household borrowing and

spending.

     An appreciation of the Australian dollar was also a downside risk, the RBA

added.

     On the upside, the RBA pointed to the possibility that global inflation

could turn out to be higher than expected. There was also upside risk from local

wages growth and inflation compared to what is assumed in the forecasts, the RBA

hinted. 

     "Domestically, there were uncertainties around the extent and speed of the

pick-up in wages growth and inflation that might occur as the unemployment rate

declined," the RBA said in the minutes.

     Earlier Tuesday, in a speech Deputy Governor Guy Debelle discussed the

risks to the forecasts in detail and said that if they come to pass, they could

have an impact on the monetary policy stance.

     "Should these risks come to pass, then they are likely to have a material

effect on the Bank's outlook for the economy. In turn, it is quite possible that

such revisions would be consequential for the Board's assessment of the

appropriate stance of monetary policy," Debelle said.

     In the minutes, the RBA noted that the Australian Prudential Regulation

Authority has been conducting a targeted review of lenders' assessments of

reasonable household expenditures in loan applications as part of efforts to

improve lending standards, and that lending standards might be tightened further

in the context of the current high level of public scrutiny of banks.

     Any impact this would have on household consumption could have a material

impact on the RBA's forecast for household consumption because in his speech

Debelle said the RBA is now more confident of its consumption forecast than

before, because of the recent upward revisions. In the minutes too, the RBA said

recent data on retail and motor vehicle sales, as well as information from its

liaison suggested household consumption momentum has continued in early 2018.

     The minutes didn't contain much discussion on the upside risks from global

inflation but this was also discussed in detail by Debelle in his speech. The

main upside risk is from the possibility that the Australian dollar could

depreciate in such a scenario, providing boost to domestic output and inflation.

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

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