MNI INSIGHT: RBA Optimistic, But Guidance More Conditional

By Sophia Rodrigues

     SYDNEY (MNI) - Although there is slightly more emphasis on the conditional

element of the Reserve Bank of Australia's guidance due to global risks and the

rise in domestic money market rates, the RBA remains confident that the next

move in the cash rate will be up.

     In the minutes of the July board meeting, published Tuesday, the RBA

reinstated the line -- omitted from the June meeting minutes -- "the next move

in the cash rate would more likely be an increase than decrease". While the RBA

prefers not to call it a forward guidance, many traders and economists think of

it as such.

     The reinstatement of the line is a reminder that there has been no change

in the view on the economy and the RBA made it a point to communicate this by

saying, "Members continued to view" the strengthening economy as likely to

deliver further progress in reducing the unemployment rate and returning

inflation to target.

     --RBA MORE CONFIDENT ABOUT ECONOMY

     If anything, the RBA is now more confident about the economy's prospects.

One data point that has enhanced the RBA's confidence is the rise in job

vacancies seen in the numbers for the February to May quarter. This data,

published by the Australian Bureau of Statistics is rarely noticed by the

market, but the latest release received a lot of attention after it showed

vacancies rising for the eighth straight quarter to a historically high level.

     The RBA is also more hopeful that growing skills shortages would lead to

wage growth pick up over time.

     Data related to the labor market is very important for monetary policy, as

Governor Philip Lowe has said that he will be patient with policy and tolerant

of low inflation as long as the labor market is improving.

     The RBA is not yet worried about slowing housing prices, and remains

confident that the pipeline of approvals will keep dwelling construction at an

elevated level for some time.

     --GLOBAL RISKS INCREASED

     As optimism on the domestic economy has increased, the RBA remains alert to

the downside risks that have grown in the past month, mainly related to global

growth. Locally, it is the rise in short-term money market rates that has made

the RBA watchful.

     These risks mean the RBA's guidance is now slightly more conditional than

before. However, because they are still only risks, not yet a threat to the

outlook for the next move in the cash rate to be up.

     The RBA continues to closely monitor developments in the money market that

has kept the Bank Bill Swap Rate at elevated levels. It recognises the

possibility that more banks could hike their mortgage rates if the BBSW rate

doesn't retrace enough. 

     But at this point, the RBA doesn't expect any rise to be big enough to

warrant a cash rate cut in response, although it could mean the timing for the

first RBA hike could be delayed.

     At far as global outlook is concerned, the RBA stated in the July minutes

that some of the downside risks to the global growth outlook had increased

recently.

     "An escalation of trade tensions could harm global growth by undermining

confidence and delaying investment decisions and could dampen international

trade," the RBA said.

     The RBA also noted that China growth appeared to have moderated a little,

with some uncertainty around how the authorities there would respond given the

trade-offs involved in achieving the target for output growth and managing

financial stability risks. Any significant slowing in Chinese growth would have

a direct impact on Australia's growth prospects.

     If these risks come to pass, they have the potential to stall the progress

in the economy expected by the RBA and an increase in these risks means the

RBA's guidance is now slightly more conditional than before. 

     But without them, the direction for the cash rate is very clear and it is

up.

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

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