MNI INSIGHT: RBA MonPol Risks Lean To Upside; Global Infla Key

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia sees upside risk to monetary

policy from higher-than-expected global growth and inflation, but a more

balanced risk -- albeit with a slight upside tilt -- on the prospects for a

pick-up in local wages and inflation.

     However, tempering the upside potential is the risk from a possible further

tightening in lending standards, where the biggest impact could be on

consumption via slowing house prices. An additional risk to consumption is the

possibility that banks would pass on a rise in funding costs to mortgage rates,

though in recent days that risk has diminished.

     Overall, the risk for RBA monetary policy remains tilted slightly to the

upside, though this could shift in the next few months if downside risks become

more prominent.

     --GLOBAL INFLATION

     In a speech earlier Tuesday, Deputy Governor Guy Debelle cited the

inflation outlook as a key uncertainty on the global front that could have

upside implications for domestic monetary policy because of the potential

downward impact on the Australian dollar.

     Interestingly, in a speech on May 1, RBA Governor Philip Lowe discussed

risks around the general outlook, but didn't mention the global inflation

outlook as one of those risks, citing only the possible escalation of global

trade tensions and China as the global risks.

     Debelle not only talked about the possibility of global inflation rising

more than expected, but also that the neutral policy rate could gradually rise.

     The upside risk on global inflation is not just because some of the

advanced economies, mainly the U.S., are very close to full capacity, but also

because of the recent rise in oil prices. The RBA sees the oil price rise as

mainly a global story, but with important implication for the Australian

economy.

     The deputy governor noted that in the U.S. the fiscal stimulus is being

imparted when the economy is very close to full capacity. "This is a similar

situation to that in the late 1960s and could lead to more inflation in the US

than currently anticipated."

     If global growth and inflation rise more than expected, it could lead to a

depreciation of the Australian dollar, and boost domestic output and lead to a

faster rise in inflation, he said.

     --DOMESTIC BLISS

     On local wage and inflation prospects, the RBA sees the risks as broadly

balanced but with a mild upside tilt. The central scenario is that wage growth

and inflation would pick up gradually as spare capacity is reduced only slowly.

     The RBA has on several occasions in the past raised the possibility that

the NAIRU could be lower than estimated. But in the May Statement on Monetary

Policy it may have already accounted for the possibility that full employment is

lower than 5%.

     As such, the forecasts may already be incorporating the downside risk,

leaving open the potential for upside risk from factors including the

possibility wage growth could pick up faster if local headline inflation rises

more than expected due to higher global inflation.

     However, there are downside risks too, with the biggest risk a relatively

new one and could affect both the outlook for household consumption and dwelling

investment. This risk is from a possible further tightening in lending standards

in Australia, particularly in the context of the current high level of public

scrutiny of banks, which would affect household borrowing and spending.

     A possible slowing in credit growth due to tighter lending standards would

have implication for house prices. The decline in wealth effect could

potentially make households' cautious in their consumption. 

     And for the RBA's monetary policy, that is a significant risk given their

outlook is for household consumption to continue its recent solid pace of

growth.

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

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

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