MNI INSIGHT: RBA Not Rattled by Housing; Next Move Likely Up

--Next Move Likely Up After Rates Held At Record Low

--Current Policy Appropriate As Employment Heads For Full Capacity

By Lachlan Colquhoun

     SYDNEY(MNI) - The Reserve Bank of Australia believes public reaction to the

declining housing market has been overdone, and still considers the next move in

interest rates is most likely to be up, MNI understands.

     The RBA left official interest rates on hold at a record low 1.5% on

Tuesday, in the expectation wages growth and inflation will accelerate in 2019.

     The widely-anticipated decision by the RBA Board at its final meeting of

2018 means official rates have been held at the current level since August 2016.

     While MNI understands the Bank is watching the declining domestic housing

and credit markets closely, it still believes that current policy settings are

appropriate for an economy in which employment is heading for full capacity and

growth is improving.

     The jobless rate is at a decade low of 5.0% and GDP data to be released on

Wednesday by the Australian Bureau of Statistics is expected to show growth at

an annualised 3.5%, although the RBA expects this to slow in 2020 as resource

exports fall back.

     --WAGES GROWTH

     In this scenario, the RBA still believes that the tightening labour market

will deliver wages growth, together with higher consumer spending and ultimately

push inflation above the current 1.9% and into its target range of between 2%

and 3%.

     The RBA forecast is for inflation to reach 2.25% in 2019 and move higher in

2020.

     While this is moving slower than previously hoped, the Bank still believes

that the next interest rate move is most likely to be an increase.

     "The stronger labour market has led to some pick-up in wages growth, which

is a welcome development," RBA Governor Philip Lowe said in his statement

announcing the Board's decision.

     "The improvement in the economy should see some further lift in wages

growth over time, although this is still expected to be a gradual process."

     The positive outlook is balanced with ongoing concerns about the housing

and credit markets, although the Bank has not been rattled so far, despite

gloomy press reports and the biggest monthly drop in house prices since the

global financial crisis in November.

     While property prices in the major markets of Sydney and Melbourne have

eased significantly from their 2017 peaks, they have so far only retreated to

2016 levels.

     Lowe's statement said that while credit demand in the housing market has

"slowed noticeably", mortgage rates remained low and there was still strong

competition for borrowers "of high credit quality."

     --HOUSEHOLD SPENDING

     With the lending practices of major banks under intense scrutiny from a

Royal Commission, the RBA is also aware that credit conditions are tightening

and this might have an impact on household spending but MNI understands this is

currently more a watching brief than a major concern.

     Externally, ongoing trade tensions are having an impact on Australia's

major trading partner, China, where growth has slowed and authorities attend to

risks in that country's financial system.

     While a lower rate of expansion in China creates headwinds for Australia,

the RBA sees a further increase in core global inflation due to tight labour

markets and a sizeable fiscal stimulus in the U.S.

     On balance, the Bank believes that its policy stance is continuing to

support progress "consistent with sustainable growth in the economy and

achieving the inflation target over time."

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

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