MNI ANALYSIS: RBA Tad More Upbeat, Omits Worry Over House Mkt

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia's optimism on the economy

appeared to have increased slightly further in September as concerns over the

housing market also dropped out of its monitoring, leaving household debt as its

main area of worry.

     In the minutes of the August board meeting, the RBA removed the labor

market as an area requiring careful monitoring and in the minutes of September

board meeting, published Tuesday, it dropped the line that the "conditions in

the housing market and household balance sheets" continue to warrant careful

monitoring. However, it retained the comment that the "need to balance the risks

associated with household debt in a low-inflation environment" was the key

reason it has left unchanged its monetary policy stance.

     At the same time, the RBA once again highlighted the impact of the

appreciation of the Australian dollar on domestic growth and inflation, and

reminded that a further appreciation "would be expected to result in a slower

pick-up in growth and inflation."

     This worry on the elevated exchange rate, coupled with medium-term concerns

about demand and prices for Australia's key export commodity -- iron ore -- 

means the RBA may have to keep the cash rate on hold for longer until it is more

confident about the growth prospects for the economy.

     The minutes of the September board meeting contained much discussion on the

labor market, with members noting that "labor market conditions had continued to

improve."

     "Forward indicators suggested that the improvement in labor market

conditions was likely to continue," the RBA said, adding that this would support

household incomes and thus spending in the period ahead.

     The commentary on wage growth didn't sound upbeat, though the RBA said that

recent wage price data and trends in new enterprise bargaining agreements were

consistent with its forecast that wage growth would remain low for some time.

     But as spare capacity in the labor market continued to decline and the

economy continued to strengthen, supported by the low level of interest rates, a

gradual increase in wages and inflation was expected, the RBA said.

     The minutes contained a special discussion on the Chinese economy, which

Governor Philip Lowe mentioned in his speech on the evening of September 5,

after the cash rate decision.

     As Lowe mentioned, the RBA discussed the challenges facing the Chinese

authorities as they balance their commitment to short-term growth targets with

their efforts to address medium-term risks arising from high and rising levels

of debt in the Chinese economy.

     Lowe, however, didn't mention the other important discussion related to

China -- the outlook for Chinese demand for iron ore.

     The RBA discussed that Chinese steel production was likely to be close to

its peak and that growth in Chinese steel production would not add much to

global demand for iron ore in the future, according to the minutes.

     The RBA noted that iron ore prices had been supported at higher levels

because of sustained strong demand for steel in China but prices were expected

to fall in the period ahead because of an ongoing expansion of global iron ore

supply followed an extended period of strong investment.

     In the longer-run, there was potential for India to have a noticeable

effect on commodity markets as investment in residential construction and

transport infrastructure increased, the RBA said.

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

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