MNI ANALYSIS: RBA Lowe Conveys Hawkishness Via Cash Rate Lens

By Sophia Rodrigues

     SYDNEY (MNI) - The direction for the Reserve Bank of Australia's cash rate

remains to the upside and any rise in lending rates due to tightening in

financial conditions may delay the move but not change the course.

     This was a signal from Governor Philip Lowe in a speech in Perth earlier

Wednesday, where he specifically said that the next move for the "cash rate" is

more likely to be up, rather than down.

     In all recent instances, Lowe has talked about the next move for "interest

rates" as more likely to be up, rather than down.

     "Cash rate" and "interest rates" are not interchangeable because the former

refers to the RBA's policy rate and the latter refers to the overall structure

of interest rates in the economy. While the cash rate certainly has an influence

on interest rates, there could be other factors that impact on the overall

interest rate structure, even as the official cash rate remains unchanged.

     --TIGHTER CONDITIONS

     In recent weeks, financial conditions have tightened in Australia as

short-term wholesale funding costs rose due to an increase in U.S. short-term

money market rates.

     There is growing concern that if this escalates further, it would lead to a

widespread increase in lending rates compared to one or two isolated instances

to date.

     Because the RBA pays close attention to the structure of interest rates in

the wider economy, any rise in lending rates would limit its ability to raise

the cash rate. And any sharp rise in lending rates could even force them to cut

the cash rate.

     But Lowe has dismissed the possibility of the cash rate going down. 

     This may be because he remains confident that any tightening in financial

conditions would not escalate enough to cause a sharp rise in lending rates. And

any smaller rises would fit in with the current progress in the economy and only

delay the first hike in the cash rate. Therefore, the direction of the cash rate

still remains up.

     --RATE HIKE SHOCK

     This was possibly the reason why Lowe acknowledged in the speech that an

increase in the cash rate will come as a shock to some people, as the last rate

hike was more than seven years ago.

     Lowe reminded that the most likely scenario in which interest rates are

increasing is one in which the economy is strengthening and income growth is

also picking up, which may be a hint that there could be scenarios where

interest rates go up even when such progress hasn't been made. That would be the

one where tightening financial conditions cause some rise in lending rates.

     What Lowe made absolutely clear is that he is committed to wait and see if

the economy make further progress in its growth, employment and inflation goals

but that commitment doesn't mean he is prepared to lower the cash rate -- at

least he doesn't see that as a possibility now. 

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

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