MNI ANALYSIS: RBA Lowe's Rate Message Turns More Upbeat

By Sophia Rodrigues

     SYDNEY (MNI) - After recently giving the clearest signal yet that the next

move in the cash rate would be up, Reserve Bank of Australia Governor Philip

Lowe strengthened his upbeat tone further on Thursday, saying that the economy

looks to be on course to make further progress in the labor market and on

inflation.

     The comments suggest the market may be correct in pricing expectations of a

cash rate hike next year, but other remarks in the speech suggest that pricing

of a nearly 80% chance of a 25bps hike by May may be a bit too optimistic.

     The speech delivered Thursday in Perth to American Chamber of Commerce in

Australia business briefing, follows comment by Lowe on September 5 where he

said that as the economy is making "further progress on both unemployment and

inflation, we could expect the cash rate to move towards this (3.5%) neutral

rate over time." It also follows other positive commentary by the RBA in the

minutes and speeches by senior officials in recent weeks.

     The key change Thursday was a comment conveying the expectation of progress

in the economy, with Lowe saying "as things currently stand, we look to be on

course to make further progress in reducing unemployment and moving towards the

midpoint of the medium-term inflation target."

     On September 5, he said "as we make further progress...."

     In the speech titled "The Next Chapter", Lowe has met the expectations by

discussing not just the future prospects for monetary policy but also the

prospects for the economy.

     Lowe talked about normalizing of monetary conditions as one of the next

chapters of Australia's economic story but cautioned that a rise in global

interest rates has no automatic implications for Australia.

     "Notwithstanding this, an increase in global interest rates would, over

time, be expected to flow through to us, just as the lower interest rates have,"

Lowe said. "Our flexible exchange rate though gives us considerable independence

regarding the timing as to when this might happen."

     Among the positives, he noted growing signs that private investment outside

the resources sector is picking up, positive news on the employment front and

expectation of a gradual increase in inflation back toward the middle of the

central bank's target range.

     He also discussed risks surrounding the outlook, even as he maintained that

the economy does look to be improving.

     "We would like to see the improvement in business investment consolidate

and a continuation of job growth at a rate at least sufficient to absorb the

increase in Australia's workforce. Some pickup in wage growth in response to the

tighter labor market would also be a welcome development. So these are some

areas to watch," Lowe said.

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

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