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--RBA No Longer Sees Labor Market As Needing Close Monitoring
--RBA Balancing High Household Debt Risk Amid Low Inflation
By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of Australia's concern about high household
debt appears to have increased further, reducing the prospect of any further
easing in monetary policy in the near term, as fading worries about employment
growth gives the central bank the flexibility to tolerate low inflation for
     But if wage growth fails to accelerate and the Australian dollar
appreciates further, the RBA's patience could be tested and easing could come
back on the table, provided there is some respite from risks around household
balance sheets. The risks have increased further because the economy is relying
on a low level of interest rates to support growth, unlike in the past when the
exchange rate also helped in the rebalancing of the economy.
     The minutes of the August board meeting, published Tuesday, showed the RBA
no longer sees developments in the labor markets as continuing to warrant
careful monitoring. Instead the RBA mentioned "household balance sheets as
continuing to warrant careful monitoring" along with conditions in the housing
     This is likely due to the fact that overall housing credit growth has
continued to outpace the relatively slow growth in household incomes despite the
rise in mortgage rates for housing investors and slowing in their mortgage
     The RBA also noted that while conditions in the Sydney and Melbourne
housing markets had eased somewhat, price growth in these two cities had
remained relatively strong.
     An elevation in concerns about the housing market and household balance
sheets means RBA will continue to be patient with low inflation outcomes.
     As Governor Philip Lowe said in his opening comments to the House of
Representatives Standing Committee on Economics last Friday, "The fact that the
unemployment rate has been broadly steady has allowed us this patience. We have
preferred a prudent approach, which is most likely to promote both macroeconomic
and financial stability consistent with the medium-term inflation target."
     Lowe's comments were echoed in the minutes, where the RBA said that it held
the stance of monetary policy unchanged at it August meeting after taking into
account available information and "the need to balance the risks associated with
high household debt in a low-inflation environment" 
     However, there may be limits to how long the RBA can balance these risks.
Of the various uncertainties, the two key ones are the prospect of a further
rise in the exchange rate as well as wage and price inflation failing to
accelerate in line with forecasts.
     The RBA said its forecasts for output growth and inflation were largely
unchanged from three months earlier but those were conditioned on the assumption
of no change in the Australian dollar during the entire forecast period which
extends to end-2019.
     "This assumption was one source of uncertainty," the RBA said.
     The RBA also pointed to the risk that wage and price inflation would follow
the pattern experienced in other economies around the world, where the rise was
not as much as expected despite these economies being close to full employment.
     This "raised the possibility that low inflation in Australia might also
persist longer than forecast," the RBA said.
     The risk of low inflation may also be high due to the fact that the
Australian Bureau of Statistics is scheduled to update the weightings in its CPI
basket. "This was expected to lower reported CPI inflation because the weights
of items whose prices had fallen were likely to be higher, whereas the weights
of items whose prices had risen were likely to be lower."
--MNI Sydney Bureau; tel: +61 2-9716-5467; email:
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