MNI INSIGHT:RBA In No Rush To Move Rates, Despite Weak Housing

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia is in no hurry to alter

interest rates after taking markets by surprise with a shift to a more neutral

stance, seeing global growth as above trend and remaining relaxed about housing

market weakness so long as it remains centred on relatively few cities, MNI

understands.

     Despite moving away from anticipating that its next move will be up to a

"more evenly balanced" rate outlook at its meeting earlier in February, the RBA

considers bearish views among analysts to be overdone. Its focus is on

influencing the medium- and longer-term picture, and thinks that maintaining

official interest rates at a record low 1.5% will provide sustainable stimulus

to the economy, whose growth outlook was downgraded in the recent Statement on

Monetary Policy.

     While accepting headwinds have increased, particularly from the slowdown in

China, RBA officials view global growth as still above trend, with unemployment

in major economies remaining low.

     --MORTGAGE ARREARS

     Even the Chinese impact may be less than feared. The Australian economy is

tied more closely to China's domestic economy than the export sector, which is

more sensitive to U.S. trade sanctions, the RBA believes.

     Also, mortgage arrears have not increased and the RBA is not expecting

property investors to rush for the exits. Prices outside Sydney, Melbourne and

Perth have remained firm and, in the case of Hobart, hit record highs.

     The RBA believes it can wait to see if its low rate policy creates

conditions for an inflation pick-up, which it expects to reach 2.0% -- the lower

point of its target range -- by June this year, and 2.4% by December 2020. If

this happens, the Bank says higher interest rates would become appropriate "at

some point".

     An alternative scenario was also mentioned in the Bank's Statement, under

which employment growth falters, inflation does not return to target, and "it

might instead be appropriate to lower the cash rate."

     In some instances, the RBA will look through lower inflation, seeing it not

as a result of a deterioration in economic conditions, but as a boost for

companies. Lower oil prices may impact headline inflation rate, the bank argues,

but lower fuel prices are a positive for many businesses.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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