MNI ANALYSIS:RBA Upbeat But Stops Short Of Signal Next Move Up

--Minutes All Round Positive But Household Spending Only Key Concern

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia presented an optimistic

assessment of the domestic economy Tuesday, appearing less worried about the

impact of a further exchange rate rise and high household debt, but worries over

household spending may be the key reason why it stopped short of signaling the

next move in interest rates is up.

     In the minutes of the October board meeting, the RBA said "the timing of

any changes in interest rates would be dependent, as always, on developments in

domestic economic conditions," the RBA said.

     It made the comment in the context of moves towards higher interest rates

in other economies, which it said were a "welcome development but did not have

mechanical implications for the setting of policy in Australia."

     There were two significant changes in the minutes, whose overall tone was

positive, both on the global and the local fronts.

     The RBA said "a material further appreciation of the exchange rate would be

expected to result in a slower pick-up in economic activity and inflation than

currently forecast." The addition was the word "material" which indicated that

the RBA wouldn't be worried if exchange rate appreciated a little further.

     The other key change was the removal of the phrase on the "need to balance

the risks associated with high household debt in a low-inflation environment" in

the last line on the policy judgement, though elsewhere the RBA said it was

important to continue to assess the various risks in household balance sheets.

     The RBA merely said that the board judged that holding the stance of

monetary policy unchanged would be consistent with sustainable growth in the

economy and achieving the inflation target over time.

     The overall optimistic tone was seen in the inclusion of domestic growth

along with economic conditions internationally as being more positive since

2016. 

     The RBA also devoted a full paragraph to a discussion of public demand,

which it said had been supported by a number of large infrastructure projects,

especially related to the construction of roads and railways. The RBA also noted

that some of this work would be undertaken by the private sector and there had

been liaison reports already suggesting some increase in private sector

investment in machinery.

     The RBA also mentioned there had been reports of plans to increase capital

investment to sustain the output of existing resource projects.

     The commentary on the labor market was more upbeat, with the RBA stating

that forward-looking indicators point to "slightly above-average growth in

employment over the remainder of 2017."

     The only key concern was on household spending. The RBA said that while

employment growth was expected to support household spending, "slow growth in

real wages and high levels of household debt were likely to be constraining

influences."

     Importantly, there was no mention of the outlook for retail trade,

including RBA's liaisons.

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

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